Here we go: The pension collapse is now underway

A few months ago, the largest public and private pension funds announced that they were so underfunded that they would have to begin cutting benefits, or in the case of Central State Pension Fund, even cut payments to retirees altogether.  But this now appears to be just the start of a worldwide pension collapse thanks mostly to the actions of global central banks in their decisions to pick a few winners to the detriment of everyone else.

The Central States Pension Fund has no new plan to avoid insolvency, fund director Thomas Nyhan said this week. Without government funding, the fund will run out of money in 10 years, he said.
At that time, pension benefits for about 407,000 people could be reduced to “virtually nothing,” he told workers and retirees in a letter sent Friday.

In a last-ditch effort, the Central States Pension Plan sought government approval to partially reduce the pensions of 115,000 retirees and the future benefits for 155,000 current workers. The proposed cuts were steep, as much as 60% for some, but it wasn’t enough. Earlier this month, the Treasury Department rejected the plan because it found that it would not actually head off insolvency.

The fund could submit a new plan, but decided this week that there’s no other way to successfully save the fund and comply with the law. The cuts needed would be too severe.

— CNN Money

This announcement was from back in May, but here in the last week of August, two new critical reports show that the problems in the global pension arena are not only limited to a segregated few, but are occurring fast and furious around the world.

America's Retirement Breakdown

World's Biggest Pension Fund (Japan) Hit with a $52 Billion Loss

Japan’s Government Pension Investment Fund (GPIF) has posted a loss of $52 billion for April to June, following the tumbling Tokyo stock market and the yen’s surge.

The value of the fund’s assets dropped $1.3 trillion last quarter, wiping out all the gains GPIF made since October 2014, when it revised its investment strategy and put more money into stocks and foreign bonds.

The decline is another disappointment for the fund after a reported annual loss of 3.8 percent for the year ended in March, the worst performance since the financial crisis in 2008.
Concerns over the US economic outlook as well as UK’s vote to quit the European Union significantly hurt global equity markets, boosting demand for Japanese currency which was seen as a haven for investors in a time of economic uncertainty.

As a result, the yen surged against other currencies, reducing the value of overseas assets by 7.8 percent.

— Russia Today

So just within the past three months we have seen the world's largest pension fund, and America's two largest public and private funds experience losses so dire to their capital that they are beginning to cut promised benefits to current and soon to be retirees.

But it certainly doesn't stop there, and in something that took place on Friday in the state of Illinois, the problem is now bringing the taxpayer into the mix at a time when the economy is ready to fall into the next recession.

As a reminder, Illinois’ fiscal 2017 pension payment to its five retirement systems was estimated at $7.9 billion, up from $7.6 billion in fiscal 2016 and $6.9 billion in fiscal 2015, according to a March report by a bipartisan legislative commission. The country’s fifth-largest state’s unfunded pension liability stood at $111 billion at the end of fiscal 2015, with TRS accounting for more than 55 percent of that gap.

This is how the Chicago Tribune summarized the Pension Fund’s dilemma:

”if the board voted for the 7 percent figure, state government would be on the hook to make up the difference,estimated to cost an extra $400 million to $500 million a year, an expense that would come due starting in July. The governor and lawmakers would have to find that extra money, worsening a state budget that’s already in free fall amid a budget impasse that’s lasted more than a year. Alternatively, if the board voted for the 7.5 percent figure, the state would not have had to pay all of that extra money right away. But if investments failed to hit the benchmark, the shortfall would have been tacked on to the pension fund’s $65 billion debt. Taxpayers would be hit either way; the question was whether it would be in the short term or long term.”

— Zerohedge

And on Aug. 26, the board DID vote to lower the estimated return from market investments down to 7% from 7.5%, meaning by law the Illinois state government must make up the shortfall with appropriations from their general budget.  And since they don't have any money, it also means that the people of Illinois can now expect increases to their taxes to make up for this new $500 million per year obligation.

Now getting back to why the Fed is the primary culprit in the killing of private and public pensions.  Both by law, and by choice, the vast majority of pension funds use stable, low risk AAA financial instruments to earn yields, which normally means they invest in sovereign, municipal, and corporate bonds, along with the occasional REIT and annuity type platforms.  But with the central banks having crushed interest rates over the past 10 years, and especially following the 2008 Credit Crisis, some pension funds have had to dip their toes into the world of speculation, which meant that their capital was very much at risk when assets such as stocks declined in the markets.

(See Japan's pension losses above, all tied to their playing in equity markets)

But sadly, it doesn't stop there.  Two state pension funds, that of Hawaii and South Carolina, are now going full retard and are selling puts in an attempt to achieve any type of yield where the markets on average have been providing only .5 - 1% return from low risk investments.

These are just the world's pensions we have described here, and do not include the insolvencies in most country's government run retirement insurance schemes, nor the trillions held by retirees who will soon be dumping their equity holdings to begin paying tax obligations on their 401K, IRA's, and mutual funds.  And when you couple this disaster with a world that is drowning in historic and unprecedented debt, the outcome is obvious, and we are now seeing the start of it as the collapse is fully underway.