How QE affects your Pension
Pfäffikon SZ, Switzerland – Investors rejoice every time the central bankers turn on the money tap a little bit further. In the past I have pointed to the existing consensus that central bankers would supposedly never let the stock prices drop – which is undoubtedly a fairy tale. Perhaps you are of the belief that this complex and boring material does not affect you. Unfortunately, nothing could be further from the truth since many European citizens are investors through their pension funds. Checking up on your pension fund’s coverage ratio will not cut it.
Hot
The coverage ratio of a pension fund is but a snapshot, yet nowadays it has become a hot item. The far more interesting question is how do pension funds expect to generate the expected returns in the future? Quantitative Easing (QE) has, among other things, resulted in the lowest yields ever on bonds. A simple consequence is that the available invested capital has to go up in order to satisfy future obligations.
Additional payments
Additionally, another problem is rearing its head. Businesses are increasingly being forced to provide additional payments into their pension funds. While the investors celebrate they do not seem to realise that many businesses will be confronted with significantly higher pension obligations. As you know there is no such thing as a free lunch and there will be less room for dividend payments to the shareholders. Subsequently, the way in which the stock price should develop itself becomes self-evident.
Increasing obligations
It becomes more interesting still when the pension obligations comprise a significant portion of the market capitalisation of the business in question. These are risks which many investors have not yet taken into account. According to Citigroup’s data the German Lufthansa has the largest deficit in relation to its market capitalisation. Second on this illustrious list is – ironically – the Dutch insurer Delta Lloyd.
The English Pension Protection Fund paints a decent picture of how the pension obligations are heaping up. In less than a year’s time the deficits have increased by more than 10 times. This trend is not about to stop as, according to the Pension Protection Fund, the pension obligations have increased by 33.9% in 2015.
Painful
Quantitative easing has several pesky side effects. Even the Dutch pension system – exalted by many – will not escape the consequences. This makes the earlier withdrawals on part of, among others, the Dutch government all the more painful. Carried out, supposedly because the pension funds were too full; a pension fund however, is never full. Many are slowly being confronted with this lesson as well as the bill, a good pension is no longer self-evident.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
