Government reports, private analysts and the media all see trouble ahead for pension plans; now the IMF is joining the chorus. The organization’s new Global Financial Stability Report warns that public pension funds, along with life insurance companies, have been loading up on dangerous investments that have left them vulnerable to collapse.The IMF report adds an interesting wrinkle to this story, exposing the Fed’s role in driving fund managers to alternative investments. The WSJ reports:
Returns from traditional investments and contributions have dwindled during the recession. And as the Federal Reserve lowered interest rates to try to revive growth, those firms have been unable to match their funding levels with future liabilities. […]“[A] protracted period of low rates could depress interest margins further and erode capital buffers, potentially driving insurance companies to further increase their credit and liquidity risk,” the IMF said.
We don’t intend to go into the wisdom of the Fed’s policies here, but this does serve as an important reminder that the pension crisis is also being driven by larger economic forces beyond the poor decisions of a few fund managers or politicians.