Increases in life expectancy and low interest rates are big problems for pension schemes.
The European Central Bank's ultra-easy monetary policy with historically low interest rates unprecedented bond purchase programmes is making it very difficult for companies offering in-house schemes for their employees to meet their pension obligations.
Under its bond-buying (or “quantitative easing”) program, the European Central Bank (ECB) intends to purchase more than €1tn in assets until at least September 2016, including government and private sector bonds, aimed at fulfilling its price stability mandate, revitalising the eurozone economy and countering deflation. According to the ECB, asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households that tends to support investment and consumption and ultimately contributes to a return of inflation rates towards 2%.
According to pension experts, the situation threatens the hopes of a comfortable retirement for millions of European citizens as there are fears that retirement payouts will have to be reduced.
Like banks and insurers, these corporate pension funds usually rely on yields or interest rates to help increase and maximise their clients' investments. But with extremely low interest rates in the euro area, pension funds are finding it difficult to meet those demands and companies have to use their own financial reserves to fulfil their pension obligations. The decline in yields presents a big problem for defined benefit pension schemes as they calculate the value of their future obligations to members based on the yields of long-term corporate bonds.
This places companies in a dilemma between safeguarding their own financial reserves while still offering attractive pension packages to their workforce as the demand for top-up schemes increases in the face of dwindling state pensions.
For more information, please read the articles of Financial Times and EurActiv and visit the website of ECB.