The Bank of Canada is keeping its trendsetting interest rate anchored at 1% for the remainder of the year, but is sending a message that it still believes the cost of borrowing in Canada will go up at some point in the future.
An observation that may be made about the current economic condition is that it is penalizing savers in favour of spenders. Pension plans in particular, which represent the interests of long-term savers in many jurisdictions, are adversely affected by these conditions. Not the least of this impact is due to challenges from low interest rates.
A little over a decade ago, pension funds could rely on allocations to government bonds to help fund their liabilities and manage risk. However, the fallout from the 2008 Financial Crisis combined with punishingly low yields on government bonds have fundamentally changed the role that sovereign debt plays in a pension portfolio.
Study of institutions and corporations suggests that inflation-linked corporate bonds are good substitute for sovereign debt
Research from U.K.-based Pension Corporation shows that trustees of the country’s DB pension funds could receive more than £100 billion in deficit reduction payments from their corporate sponsors over the next three years, or 13% of U.K. corporate cash holdings.
UK trustees concerned about market volatility but are under-hedged against longevity, investment and inflation.
History shows inflation isn't the only risk out there.
The 2011 Investment Innovation Conference concluded with a panel discussion on yet another potential risk to pension liabilities: inflation.
With the erosion of assets in many retirement portfolios in recent years, plan sponsors are starting to wonder if members might never be able to retire.
Coverage of the 2011 Investment Innovation Conference.