Pension funds in new crisis as deficit hole grows

By Natsuko Waki

LONDON | Mon Sep 5, 2011 9:58am EDT

LONDON (Reuters) - Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees.

At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis.

But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds.

With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions.

For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both.

This year has been a nightmare for many in the industry -- which controls $35 trillion (22 trillion pounds), or a third of global financial assets -- and funding deficits are posting double-digit rises.

"We had a credit crisis and government bond crisis, and the third one we have is the pension crisis. This is the one where everything is going wrong and there's no obvious way out," said Kevin Wesbroom, UK head of global risk services at consultancy Aon Hewitt.

The sharp retreat in stocks through the summer has hurt them again by weakening their asset positions and threatening to erode stock market recoveries seen since the equity collapse surrounding the 2007-2009 credit crisis.

Even lower bond yields are proving to be a new headache.

"The real killer is liabilities are going up because in the flight to quality everyone gets out of equities and runs for cover in safe assets like government bonds, and yields are falling," said Wesbroom.

Many defined benefitDB.L pension plans -- where benefits are pre-determined -- pay a fixed stream of income to retirees.

The low-yielding environment makes it harder for the funds to meet these bond-like liabilities, forcing them to accumulate even more fixed income instruments to try to meet their obligations, creating a vicious circle.

FALLING YIELDS

Recent data on pension deficits highlight the plight of many pension funds.

In the United States, funding deficits of the 100 largest DB plans rose $68 billion to $254 billion in July, according to the Milliman Pension Fund Index. July marked the 10th largest deficit rise in the index's 11 year history.

Even if these companies were to achieve an optimistic annual return of as much as 8 percent and keep the current benchmark yield of 5.12 percent, their funding status is not estimated to improve beyond 93 percent by end-2013 from the current 83 percent.

Aon Hewitt estimates deficits of DB pension plans for FTSE 350 companies as of end-August rose 20 billion pounds from July to a 2011 high of 58 billion pounds. Their funding ratio stands at 89.8 percent, down from 94.1 percent three years ago.

The drop in the funding ratio is driven by a rally in the fixed income market. In Europe, the double-A rated corporate bond yield -- one of the benchmark rates used by regulators -- fell 300 basis points in the last three years to 3.55 percent, according to Barclays Capital.

The widely used rule of thumb is that a 50 basis points fall in the discount rate roughly results in a 10 percent increase in liabilities.

"Things look substantially worse now than they were during the credit crisis," said Pat Race, senior partner at investment consultancy Mercer.

In reaction to the past few years of an equity decline and volatility, many pension funds are indeed planning to buy more bonds, a move highlighted by Mercer's survey of over 1,000 European DB pension funds in May.

"Trustees do want to de-risk but financial directors have irrational desire to have equities. They are too wedded to equity markets," Race said.

"You still have massive uncertainties with a potential for another dip into recession. I don't see any reversion to days when equities are dominant part of DB plans."

JP Morgan's data shows pension funds and insurance companies in the United States, euro zone, Japan and UK bought $173 billion of bonds in the first quarter, boosting their bond buying for the third quarter in a row.

At the same time, they cut equity buying for a fifth quarter in a row, selling $22 billion of stocks in Q1.

In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.

EQUITY PREMIUM PUZZLE

Growing pension funds deficits on corporate balance sheets may make it more difficult for companies to access credit and discourage firms which are already hoarding cash from spending cash to expand business.

For wider financial markets, the giant industry's gradual move away from stocks could hit equity risk premium -- excess return of equities over risk-free securities which compensates investors for taking on the relatively higher risk.

This may reinvigorate an academic debate where some economic analysis suggests the equity risk premium should be small, in most cases less than half a percentage point, as opposed to the widely-used range of 4-6 percent.

Indeed, 10-year U.S. Treasuries gave higher total returns in the past 10 years on a rolling basis than world stocks.

"The puzzle... is that for the past 20 years, there has been no net equity risk premium. With the recent sell-off in risk and the rally in bonds, I think there might have been a net premium on bonds," Stephen Jen, managing partner at SLJ Macro Partners, said in a note to clients.

"This has turned financial theory on its head, and managers of pension funds and sovereign wealth funds need to think about this very carefully."

(Editing by Anna Willard)

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AP-GfK Poll: Japanese support for US bases grows - The Associated Press

AP-GfK Poll: Japanese support for US bases growsBy MALCOLM FOSTER, Associated Press – 5 hours ago 

TOKYO (AP) — Japanese have become more welcoming to the U.S. military presence in their country over the past six years as fears spread that neighboring China and North Korea are threats to peace, an Associated Press-GfK poll has found.

The survey released Monday on Japanese views of other countries, security and the imperial family also showed that while about half of Japanese are positive about the U.S. and Germany, they are overwhelmingly negative or neutral toward immediate Asian neighbors China, Russia and North Korea. Opinions about South Korea are mixed.

Those attitudes, as well as results showing Japanese are reluctant to allow more foreign workers into the country, suggest a general wariness of outsiders. Some 46 percent are opposed to increasing the number of immigrants — more than double the share in favor of boosting their numbers — even though doing so would help offset the shrinking labor force as the population ages.

And while they gave their own elected leaders low marks, most Japanese think highly of the emperor and military.

Tokyo has cast a cautious eye toward China's increased military spending and more assertive stance on disputed islands in the region. Ties between the two countries deteriorated to their worst point in years last autumn when a Chinese fishing trawler and Japanese patrol vessels collided near islands controlled by Japan but claimed by both in the East China Sea.

China's state-run media have already issued warnings to new Japanese Prime Minister Yoshihiko Noda for past statements suggesting that Beijing's military buildup is a regional security threat.

For protection, Japan relies on its own military and nearly 50,000 U.S. troops based in the country under a 51-year-old joint security pact. That arrangement received extra scrutiny last year when former Prime Minister Yukio Hatoyama sought — and ultimately failed — to move a controversial U.S. Marine base off the southern island of Okinawa.

American forces were also actively involved in humanitarian relief efforts after March's tsunami disaster.

Amid public alarm about China's assertiveness, support for the American military bases in Japan has grown to 57 percent, while 34 percent want them withdrawn. In a similar 2005 poll, Japanese were evenly divided on the issue at 47 percent.

"The U.S. military presence has received a greater acceptance, apparently because people think this region has grown more unstable than before," Foreign Minister Koichiro Genba said Monday in response to the results.

China is viewed as a threat to world peace by nearly three-quarters of respondents, and about as many have a negative impression of the country — which is also Japan's largest trading partner. Unfavorable views of Chinese leader Hu Jintao outweigh favorable views by more than 11-to-1, the AP-GfK poll showed.

North Korea, meanwhile, is viewed as a threat by even more Japanese — 80 percent, up from 59 percent in 2005. The country, which fired missiles into waters between the Korean peninsula and Japan in 2005 and again in 2006, is viewed negatively by 94 percent. Its leader, Kim Jong Il, is disliked by nine in 10.

Many Japanese are supportive of their own military, called the Self-Defense Forces, with 74 percent trusting it to do the right thing all or most of the time.

But people were mixed over changing the constitution to give the military a greater international role, although more favored such a change — 38 percent — than opposed — 28 percent. About a third were neutral.

The Japanese Constitution, drawn up by a U.S. occupation force after World War II, prohibits the creation of an armed force that can be maintained for offensive purposes. But under pressure from the U.S. to play a larger role in regional security, Japan has become more involved in peacekeeping operations abroad. It also sent refueling ships to the Indian Ocean to help with the Afghan war.

Most Japanese continue to hold Emperor Akihito, who lacks any political power, in high esteem: 70 percent view him favorably and 65 percent feel the Imperial family still fits well with modern Japanese society.

Still, just 22 percent would favor giving the emperor power to set government policy, while 43 percent oppose such an expansion of imperial power. About a third are neutral.

President Barack Obama is seen positively by 41 percent of respondents, with the same number viewing him in a neutral way. Some 16 percent see him unfavorably. As a country, the United States is seen favorably by 49 percent, neutrally by 36 percent and unfavorably by 14 percent.

Germany garnered the smallest unfavorable rating — just 4 percent — with 48 percent giving the country a thumbs up. Chancellor Angela Merkel garnered a neutral rating from just over half the respondents, while 28 percent view her positively and 7 percent negatively.

Neighboring South Korea, whose television dramas and "K-pop" singers have become increasingly popular in Japan, isn't so popular itself, with 31 percent viewing the country positively and 27 percent negatively.

Russia, meanwhile, is viewed positively by just 11 percent and negatively by 44 percent.

Japan has come under fire internationally for its whale hunting, but the Japanese public narrowly favors whaling for commercial purposes, the survey showed. Fifty-two percent favor it, 35 percent are neutral and 13 percent are opposed. Far more men are in favor than women.

However, few — 12 percent — are deeply interested in eating whale meat themselves. Most — 66 percent— have little or no interest in dining on whale.

Commercial whaling is banned under a 1986 moratorium but various exceptions have allowed Japan, as well as Iceland and Norway, to hunt whales anyway. Japan claims its hunts are for research purposes, though the meat from the killed whales mostly ends up in restaurants, stores and school lunches.

The AP-GfK telephone poll conducted by GfK Roper Public Affairs and Corporate Communications surveyed 1,000 adults across Japan by landline telephone between July 29 and Aug. 10, and has a margin of error of 3.8 percentage points.

Associated Press writer Mari Yamaguchi contributed to this report.

Copyright © 2011 The Associated Press. All rights reserved.

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AP-GfK Poll: Japanese support for US bases grows (AP)

TOKYO – Japanese have become more welcoming to the U.S. military presence in their country over the past six years as fears spread that neighboring China and North Korea are threats to peace, an Associated Press-GfK poll has found.

The survey released Monday on Japanese views of other countries, security and the imperial family also showed that while about half of Japanese are positive about the U.S. and Germany, they are overwhelmingly negative or neutral toward immediate Asian neighbors China, Russia and North Korea. Opinions about South Korea are mixed.

Those attitudes, as well as results showing Japanese are reluctant to allow more foreign workers into the country, suggest a general wariness of outsiders. Some 46 percent are opposed to increasing the number of immigrants — more than double the share in favor of boosting their numbers — even though doing so would help offset the shrinking labor force as the population ages.

And while they gave their own elected leaders low marks, most Japanese think highly of the emperor and military.

Tokyo has cast a cautious eye toward China's increased military spending and more assertive stance on disputed islands in the region. Ties between the two countries deteriorated to their worst point in years last autumn when a Chinese fishing trawler and Japanese patrol vessels collided near islands controlled by Japan but claimed by both in the East China Sea.

China's state-run media have already issued warnings to new Japanese Prime Minister Yoshihiko Noda for past statements suggesting that Beijing's military buildup is a regional security threat.

For protection, Japan relies on its own military and nearly 50,000 U.S. troops based in the country under a 51-year-old joint security pact. That arrangement received extra scrutiny last year when former Prime Minister Yukio Hatoyama sought — and ultimately failed — to move a controversial U.S. Marine base off the southern island of Okinawa.

American forces were also actively involved in humanitarian relief efforts after March's tsunami disaster.

Amid public alarm about China's assertiveness, support for the American military bases in Japan has grown to 57 percent, while 34 percent want them withdrawn. In a similar 2005 poll, Japanese were evenly divided on the issue at 47 percent.

"The U.S. military presence has received a greater acceptance, apparently because people think this region has grown more unstable than before," Foreign Minister Koichiro Genba said Monday in response to the results.

China is viewed as a threat to world peace by nearly three-quarters of respondents, and about as many have a negative impression of the country — which is also Japan's largest trading partner. Unfavorable views of Chinese leader Hu Jintao outweigh favorable views by more than 11-to-1, the AP-GfK poll showed.

North Korea, meanwhile, is viewed as a threat by even more Japanese — 80 percent, up from 59 percent in 2005. The country, which fired missiles into waters between the Korean peninsula and Japan in 2005 and again in 2006, is viewed negatively by 94 percent. Its leader, Kim Jong Il, is disliked by nine in 10.

Many Japanese are supportive of their own military, called the Self-Defense Forces, with 74 percent trusting it to do the right thing all or most of the time.

But people were mixed over changing the constitution to give the military a greater international role, although more favored such a change — 38 percent — than opposed — 28 percent. About a third were neutral.

The Japanese Constitution, drawn up by a U.S. occupation force after World War II, prohibits the creation of an armed force that can be maintained for offensive purposes. But under pressure from the U.S. to play a larger role in regional security, Japan has become more involved in peacekeeping operations abroad. It also sent refueling ships to the Indian Ocean to help with the Afghan war.

Most Japanese continue to hold Emperor Akihito, who lacks any political power, in high esteem: 70 percent view him favorably and 65 percent feel the Imperial family still fits well with modern Japanese society.

Still, just 22 percent would favor giving the emperor power to set government policy, while 43 percent oppose such an expansion of imperial power. About a third are neutral.

President Barack Obama is seen positively by 41 percent of respondents, with the same number viewing him in a neutral way. Some 16 percent see him unfavorably. As a country, the United States is seen favorably by 49 percent, neutrally by 36 percent and unfavorably by 14 percent.

Germany garnered the smallest unfavorable rating — just 4 percent — with 48 percent giving the country a thumbs up. Chancellor Angela Merkel garnered a neutral rating from just over half the respondents, while 28 percent view her positively and 7 percent negatively.

Neighboring South Korea, whose television dramas and "K-pop" singers have become increasingly popular in Japan, isn't so popular itself, with 31 percent viewing the country positively and 27 percent negatively.

Russia, meanwhile, is viewed positively by just 11 percent and negatively by 44 percent.

Japan has come under fire internationally for its whale hunting, but the Japanese public narrowly favors whaling for commercial purposes, the survey showed. Fifty-two percent favor it, 35 percent are neutral and 13 percent are opposed. Far more men are in favor than women.

However, few — 12 percent — are deeply interested in eating whale meat themselves. Most — 66 percent_ have little or no interest in dining on whale.

Commercial whaling is banned under a 1986 moratorium but various exceptions have allowed Japan, as well as Iceland and Norway, to hunt whales anyway. Japan claims its hunts are for research purposes, though the meat from the killed whales mostly ends up in restaurants, stores and school lunches.

The AP-GfK telephone poll conducted by GfK Roper Public Affairs and Corporate Communications surveyed 1,000 adults across Japan by landline telephone between July 29 and Aug. 10, and has a margin of error of 3.8 percentage points.

___

Associated Press writer Mari Yamaguchi contributed to this report.

___

Online:

http://www.ap-gfkpoll.com

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