PITY the pension-fund manager. Cash pays close to zero in many developed economies and ten-year Treasury bonds offer a yield of 2.3%. But many managers need much higher returns if they are to pay the benefits they have promised. That forces them to pile into equities, despite the risks of big bear markets like 2001-02 or 2008-09, not to mention minor scares like mid-October’s wobble.The problem afflicts firms that maintain “defined-benefit” pension plans, which pay retirement incomes linked to a worker’s final salary. A plunge in the stockmarket creates a big deficit in the pension scheme and a nasty hole in the sponsoring company’s balance-sheet. That can weigh on the share price: a new study by Llewellyn Consulting found that a £100 increase in the pension deficit of a FTSE 100 company reduces its market value by £160.The alternative approach, of avoiding risk altogether, may be no more palatable. The company would have to invest in inflation-linked government bonds that offer very low real returns. There would need to be a big increase in contributions to ensure benefits were paid.The holy grail would be a combination of equity-like returns...
from The Economist: Finance and economics http://ift.tt/105NCSX
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