He’s Baaack

It’s Lakshman Achuthan back on CNBC. Needless to say, he’s sticking with his recession call.

Of course, this means more financial repression from the Fed, at least until the system finally collapses. There was an interesting note in the Economist on the effects of the Fed’s crush on interest rates.

Meanwhile, a longer-term problem is being stored up. Many companies have abandoned final-salary or defined-benefit (DB) pensions for new staff and switched to defined-contribution (DC) schemes, in large part because of the high cost of the former. These place the investment risk firmly on the employee.

Low real interest rates imply that workers should save a bigger sum for their old age in order to generate their desired income. But currently payments into British DC schemes, from both employer and employee, are just 8.9% of salary (the American contribution numbers are similar). According to the Pensions Corporation, another consultancy, a 35-year-old who funds a DC scheme at such a level will retire on just 8% of his final salary if interest rates are low. To earn the equivalent of a DB pension worth half their final pay-cheque, they or their employer would have to contribute 55% of their salary.

That might sound a tall order. But funnily enough, the Bank of England contributes 56.4% of its payroll to its DB scheme, which is almost entirely invested in inflation-linked bonds. It is a nice irony that the bank, which has done so much to discourage saving, is one of the most prudent savers of all.

There are a couple of take-aways from this. First of all, if you are saving for retirement you can’t be satisfied with low rates (the projection above was based on inflation-indexed government bonds, “TIPS” in the U.S.). There are no adequate buy-and-hold returns out there. You’ve got to watch your nest egg and move it as necessary. Secondly, the defined benefit schemes out there, principally for government employees, are in a world of hurt. Too much hurt for taxpayers to stand, I expect.

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