Illustration of Pension Fund Problem – Low Risk Investments with Low Returns

In this CIIA Final Exam question it is easy to see why our pension fund system, which invests large amounts in bonds will not achieve the return targets promised or needed by pensioners currently paying into the system.

The returns generated with a high percentage invested in bonds versus the low percentage invested in equity is a proposition that will lead to problems in half of the outcomes, now that central banks have effectively capped interest rates for the time being.

The last paragraph shows how the 3% p.a. target return won’t be achieved in close to 90% of the cases over a 30-year period. A high equity proportion on the other hand would lead to a much better risk reward.

Once a central bank has used stimulus via low interest rates, it’s very hard to get away. That can be seen in Japan where the low interest rate environment has been ongoing for close to two decades.pension-fund-problem-1pension-fund-problem  pension-fund-problem-2pension-fund-problem-3

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