How COVID-19 Has Further Crippled the Global Pension System (w/ Leo Kolivakis)

TL;DR

Pensions are facing challenges due to both the decline in asset values and low interest rates, leading to deteriorating funded statuses. Canadian pensions are better positioned than US pensions due to strong balance sheets, but underfunded pensions may struggle to recover.

Transcript

ED HARRISON: I'm talking to Leo Kolivakis who is the founder and editor, publisher of Pension Pulse. You're a pension expert, Leo, and I'm talking to you because we're in the middle of a crisis that really I think is affecting pensions and I want to get your perspective on what the effect exactly is on pensions, their solvency and what the risks ar... Read More

Key Insights

• 💮 Pensions are being hit on both the asset and liability sides, as synchronized shutdowns and low interest rates impact their funded statuses.
• 🚟 The crisis has highlighted the importance of governance and funding status in determining the resilience of pensions.
• 💪 Well-funded pensions with strong balance sheets are better positioned to weather the storm and capitalize on market dislocations.
• 😑 The economic impact of the pandemic may lead to a mass bailout of pensions, regardless of their pre-crisis funding status.
• 🚟 The Federal Reserve's actions, such as buying municipal bonds, may stabilize some pension assets, but it may not be enough to address underfunding.
• 🥺 Volatility-selling strategies, such as the one employed by AIM Co, can lead to substantial losses during unprecedented market conditions.
• 👻 Canadian pensions' investments in private markets allow them to diversify their portfolio and potentially generate higher long-term returns. Liquidity is crucial in helping portfolio companies through the crisis.

Questions & Answers

Q: How are pensions being affected by the pandemic?

Pensions are facing challenges from declining asset values and record-low interest rates, leading to deteriorating funded statuses. Both public and private market assets are being hit as global economies shut down.

Q: What are the implications of low interest rates on pensions?

Low interest rates greatly impact pension funding, as the decline in rates causes the funded status to deteriorate rapidly. This situation is worrisome, especially considering that interest rates are at levels not seen in decades.

Q: How do Canadian and US pensions differ in their ability to weather the crisis?

Canadian pensions entered the crisis fully funded or overfunded, providing a buffer to withstand the challenges. They are likely to emerge stronger in the long run. On the other hand, many US pensions were already underfunded, making it harder for them to capitalize on market dislocations and recover from the crisis.

Q: What strategies can pensions employ to address underfunding?

Canadian pensions are able to lower discount rates and implement conditional inflation protection to address underfunding. These measures help stabilize the funded status in the short term. However, US pensions may be forced to rely on taxing businesses and corporations, which could have negative implications for the economy.

Summary & Key Takeaways

• Pensions are being affected by the pandemic through the decline in asset values caused by synchronized global economic shutdowns.

• Low interest rates are also negatively impacting pensions as they result in deteriorating funded statuses.

• Canadian pensions, which entered the crisis well-funded, are better equipped to weather the storm and capitalize on market dislocations. However, underfunded US pensions may struggle to recover due to financial limitations.