Analysis

UK Pension Funds Blow Up. US Next?

From today's Wall Street Journal:

Pensions in particular are blowing up because the funds are highly sensitive to changes in interest rates as they seek to balance assets and liabilities over long time horizons. And the explosion is happening in Britain because defined-benefit pension plans—the most interest-sensitive—remain more common in the U.K. than in the U.S. As of 2019 about 35% of Britons enrolled in a private pension were in a defined-benefit scheme, while the U.S. proportion had fallen to 23%.

This is triggering a crisis as the pension funds assets crater. They do the prudent thing by matching assets to liabilities by purchasing bonds that mature at the same date as their liabilities. But then the Bank of England jacks up interest rates and bonds tank meaning their assets are trash.

UK pension funds are literally begging the BOE to keep buying bonds to support the bond market. In addition, a tanking bond market means that liquidity dries up for bonds issued in the past so the pension funds are ham stringed in their ability to even cut their risk.

The US will follow though now as badly.

Here's the real point. I have said that the current recession would not be like 2008 which was a direct result of too much debt in consumer hands. I have been saying for two years that this recession would be led by corporations and governments.

This pension crisis is a crisis primarily in the corporate and government sectors. Many pension funds, particularly government funds, are underfunded. The sharp drop in the bond market simply means they are getting more underfunded by the minute.

We now have two developing financial crises: