central bankers lowered interest rates to near zero or below to try to revive their gasping economies. in the process, though, they have put in jeopardy the pensions of more than 100 million government workers and retirees around the globe. in costa mesa, calif., mayor stephen mensinger is worried retirement payments will soon eat up all the city<u+2019>s cash. in amsterdam, language teacher frans van leeuwen is angry his pension now will be less than what his father received, despite 30 years of contributions. in tokyo, ex-government worker tadakazu kobayashi no longer has enough income from pension checks to buy new clothes. managers handling trillions of dollars in government-run pension funds never expected rates to stay this low for so long. now, the world is starved for the safe, profitable bonds that pension funds have long needed to survive. that has pulled down investment returns and made it difficult for funds to meet mounting obligations to workers and retirees who are drawing government pensions. as low interest rates suppress investment gains in the pension plans , it generally means one thing: standards of living for workers and retirees are decreasing, not increasing. <u+201c>unless ordinary people have money in their pockets, they don<u+2019>t spend,<u+201d> the 70-year-old mr.<u+00a0>kobayashi said during a recent protest of benefit cuts in downtown tokyo. <u+201c>higher interest rates would mean there<u+2019>d be more money at our disposal,<u+00a0>even if slightly.<u+201d> the low rates exacerbate cash problems already bedeviling the world<u+2019>s pension funds. decades of underfunding, benefit overpromises, government austerity measures and two recessions have left many retirement systems with deep funding holes. a wave of retirees world-wide is leaving fewer active workers left to contribute. the 60-and-older demographic is expected to roughly double between now and 2050, according to the united nations. government-bond yields have risen since donald trump was elected u.s. president, though few investors expect a prolonged climb. regardless, the ultralow bond yields of recent years have already hindered the most straightforward way for retirement funds to recover<u+2014>through investment gains. pension<u+00a0>officials and government leaders are left with vexing choices. as investors, they have to stash away more than they did before or pile into riskier bets in hedge funds, private equity or commodities. countries, states and cities must decide whether to reduce benefits for existing workers, cut back public services or raise taxes to pay for the<u+00a0>bulging<u+00a0>obligations. <u+201c>interest rates have never been so low,<u+201d> said corien wortmann-kool, chairwoman of the netherlands-based<u+00a0>stichting pensioenfonds abp, europe<u+2019>s largest pension<u+00a0>fund. it manages assets worth <u+20ac>381 billion, or $414 billion. <u+201c>that has put the whole system under pressure.<u+201d> only about 40% of abp<u+2019>s 2.8 million members are active employees paying into the fund. pension<u+00a0>funds around the world pay benefits through a combination of investment gains and contributions from employers and workers. to ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. they range from as low as a government bond yield in much of europe and asia to 8% or more<u+00a0>in the u.s. the problem is that investment-grade bonds that once churned out 7.5% a year are now barely yielding anything. global pensions<u+00a0>on average have<u+00a0>roughly 30%<u+00a0>of their money in bonds. low rates helped pull down assets of the world<u+2019>s 300 largest pension funds by<u+00a0>$530 billion<u+00a0>in 2015, the first decline since the financial crisis, according to a recent<u+00a0>pensions<u+00a0>& investments and willis towers watson report. funding gaps for the two biggest funds in europe and the u.s. have ballooned by $300 billion since 2008, according to a wall street journal analysis. few parts of europe are feeling the<u+00a0>pension pain more acutely than the netherlands, home to 17 million people and part of the eurozone, which introduced negative rates in 2014. unlike countries such as france and italy, where<u+00a0>pensions<u+00a0>are an annual budget item, the<u+00a0>netherlands has several large plans that stockpile assets and invest them.<u+00a0>the goal is for profits to grow faster than retiree obligations, allowing the pension to become financially self-sufficient and shrink as an expense to lawmakers. abp currently holds 90.7 cents for every euro of obligations, a ratio that would be welcome in other corners of the world. but dutch regulators demand pension assets exceed liabilities, meaning more cash is required than actually needed. this spring, abp officials had to provide government regulators a rescue plan<u+00a0>after years of worsening finances.<u+00a0>abp<u+2019>s members, representing one in six people in the netherlands, haven<u+2019>t seen their pension<u+00a0>checks increase in a decade. abp officials have warned payments may<u+00a0>be cut 1% next year. <u+201c>people are angry, not because<u+00a0>pensions<u+00a0>are low, but because we failed to deliver what we promised them,<u+201d> said gerard riemen, managing director of the pensioenfederatie, a federation of 260 dutch<u+00a0>pension<u+00a0>funds managing a total of one trillion euros. benefit<u+00a0>cuts have become<u+00a0>such<u+00a0>a divisive issue that one party, 50plus, plans<u+00a0>for parliamentary-election campaigns early next year that demand the end of <u+201c>pension robbery.<u+201d> <u+201c>giving certainty has become expensive,<u+201d> said ms. wortmann-kool, abp<u+2019>s chairwoman. that is tough to swallow for mr. van<u+00a0>leeuwen, the amsterdam language teacher. sitting on a bench near one of the city<u+2019>s historic canals, he<u+00a0>fumed over how he had paid the abp every month for decades for a pension<u+00a0>he now believes will be less than he expected. japan is wrestling with the same question of generational inequality. roughly one-quarter of its 127 million residents are now old enough to collect a<u+00a0>pension. more than one-third will<u+00a0>be by 2035. the demographic shift means contributions from active workers aren<u+2019>t sufficient to cover obligations to retirees. the government has tried to alleviate that pressure. it<u+00a0>decided to<u+00a0>gradually increase<u+00a0>the minimum age to collect a pension to 65, to require greater contributions from<u+00a0>workers<u+00a0>and employers<u+00a0>and to reduce payouts to retirees. a typical japanese couple who are both 65 would collect today a monthly pension of <u+00a5>218,000 ($2,048). if they live to their early 90s, those payouts, adjusted for inflation, would drop 12% to <u+00a5>192,000. the japanese government has turned to its $1.3 trillion government pension investment fund for cash injections six of the past seven years. that fund, the largest of its kind in the world, manages reserves for japan<u+2019>s public-pension system and seeks to earn returns that outpace inflation. the more it earns, the more it can shore up the government<u+2019>s pension system. in february, japanese central bankers adopted negative interest rates for the first time on some excess reserves held at the central bank so commercial banks would boost lending. the pension-investment fund raised a political ruckus in august when it said it lost about<u+00a0><u+00a5>5.2 trillion ($49 billion)<u+00a0>in the space of three months, the result of a foray into volatile global assets as it tried to escape low rates at home. the fund<u+2019>s target holdings of low-yielding japanese bonds were cut to 35% of assets, from 60% two years ago, and it has added heaps of foreign and domestic stocks. it is now considering investing more in private equity. the government-mandated target is a 1.7% return above wage growth. <u+201c>we<u+2019>d like to strive to accomplish that goal,<u+201d> said shinichiro mori, a deputy director-general of the fund<u+2019>s investment-strategy department. the fund posted a loss of 3.8% for the year ended in march because of the yen<u+2019>s surge and global economic uncertainty. it was its worst performance since the 2008 global financial crisis .<u+00a0>mr. mori said performance <u+201c>should be evaluated from a long-term perspective,<u+201d> citing returns of<u+00a0><u+00a5>40 trillion ($376 billion) since<u+00a0>2001. mr. kobayashi, the former tokyo government worker, said the government<u+2019>s effort to boost returns by making riskier investments was supposed to <u+201c>increase benefits for everyone, even if only slightly. it didn<u+2019>t turn out that way<u+2026>and they are inflicting the loss on us.<u+201d> mr. kobayashi joined roughly 2,300 people who marched in downtown<u+00a0>tokyo<u+00a0>in october<u+00a0>to protest government plans to cut pension benefits<u+00a0>further. in the u.s., the country<u+2019>s largest public-pension<u+00a0>plan is struggling with the<u+00a0>same<u+00a0>bleak outlook. the california public employees<u+2019> retirement system, which handles benefits for 1.8 million members, recently posted a 0.6% return for its 2016 fiscal year, its worst annual result since the financial crisis . its investment consultant recently estimated that annual returns will be closer to 6% over the next decade, shy of its 7.5% annual target. calpers investment chief ted<u+00a0>eliopoulos <u+2019>s strategy for the era of lower returns is to reduce costs and the complexity in the fund<u+2019>s $300 billion portfolio. he and the board decided to pull out of hedge funds, shop major chunks of calpers<u+2019> real-estate and forestry portfolios and halve the number of external money managers by 2020. <u+201c>calpers isn<u+2019>t taking a passive approach to the anticipated lower return rates,<u+201d> fund spokeswoman megan white said. <u+201c>we continue to reassess our strategies to improve performance.<u+201d> yet the sacramento-based plan still has just 68% of the money needed to meet future retirement obligations. that means cash-strapped cities and counties that make annual payments to calpers could be forced to pay more. that is a concern even for cities such as affluent costa mesa in orange county, which has a strong tax base from rising home prices and a bustling, upscale shopping center. the city has outsourced government services such as park maintenance,<u+00a0>street sweeping<u+00a0>and the jail, as a way to absorb higher payments to calpers. pension payments currently consume about $20 million of the $100 million annual budget, but are expected to rise to $40 million in five years. the outsourcing and other moves eliminated one-quarter of the city<u+2019>s workers.<u+00a0>the cost of benefits for those remaining will surge to 81 cents of every salary dollar by 2023, from 37 cents in 2013, according to city officials. the mayor, mr. mensinger, is hopeful for a state solution<u+00a0>involving new taxes or a benefits overhaul,<u+00a0>either from lawmakers in sacramento or<u+00a0>from a california ballot initiative for 2018 that would cap the amount cities pay toward pension benefits for new workers. weaker cities across california could face bankruptcy without help, said former san jose mayor chuck reed, who oversaw a pension overhaul there in 2012 and is backing the 2018 initiative<u+00a0>that would shift onto workers any extra cost above the capped levels.<u+00a0><u+201c>something is broken,<u+201d> he said. <u+201c>the plans are all based on assumptions that have been overly optimistic.<u+201d> costa mesa resident james nance, 52, worries the city<u+2019>s<u+00a0>pension<u+00a0>burden will affect daily life. <u+201c>we could use more police,<u+201d> said the self-employed spa repairman. <u+201c>i<u+2019>d like to know the city is safe and well protected, but i know there have been tremendous cutbacks.<u+201d> costa mesa ended the latest fiscal year with an $11 million surplus, its largest ever. but that will soon disappear, mr. mensinger said, as<u+00a0>pension<u+00a0>costs swallow up $2 of every $5 spent by the city. <u+201c>we have this gigantic overhead cliff called<u+00a0>pensions.<u+201d> write to timothy w. martin at timothy.martin@wsj.com , georgi kantchev at georgi.kantchev@wsj.com and kosaku narioka at kosaku.narioka@wsj.com
era of low interest rates hammers millions of pensions around world - wsj
timothy w. martin georgi kantchev kosaku narioka