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Risky Retirement Business

Regardless of whether yields in advanced economies rise, fall, or stay the same, core demographic trends are unlikely to change in the coming years, implying that pension costs will continue to balloon. Is there an asset class that can provide yield-hungry pension-fund managers what they're looking for?

CAMBRIDGE – The challenges posed by an aging population are manifold, and they are neither new nor unique. The populations of Italy and Japan have been declining for some time, and in the United States, numerous state governments’ large unfunded pension liabilities are a chronic problem.

While low interest rates in most advanced economies have held down governments’ borrowing costs, they pose significant challenges for pension asset management. In real (inflation-adjusted) terms, returns on Japanese, German, and other European sovereign bonds have been negative for some time. Short-term interest rates on US Treasuries may have drifted higher as the Federal Reserve began to unwind its post-crisis stimulus policies (and may edge higher still after the Fed’s current pause), but longer-term US interest rates remain low by historical standards.

The two decades after World War II, as one of us has documented, were also characterized by low real returns on government bonds in both the US and elsewhere. Unlike now, however, that era boasted a much younger and faster-growing population. Furthermore, households had trivial debt levels by modern standards. The solvency of pension plans was not yet a concern.