Sir, I agree with Martin Wolf that low interest rates allow for cheaper borrowing by governments for infrastructure and other productivity-enhancing investments (“ The unwise war against low interest rates”, October 19). I believe he makes a serious error, however, when he states that “lower interest rates need not worsen pension deficits; that depends on what happens to the value of assets held by pension funds”, suggesting that lower rates increase (artificially?) the value of risk assets in pension plans.
This is a false yet common assumption about pensions. The pension surplus/deficit is actually the difference between the value of the assets and the liabilities in the plan. Lower interest rates also lower the discount rate used to value the liabilities of the plan, which vastly increases these obligations. Given the financial repression of the past seven years and using Mr Wolf’s own logic, one might assume that few underfunded plans exist. A cursory reading of your own newspaper tells a different tale — Britain’s BHS pension plan (broke), Chicago Teachers’ Pension Plan (insolvent), and Detroit (bankruptcy) confirm the obvious fact that assets are at most part of the story. It is the liabilities and their accurate valuation that really matter with respect to funded status.
Contrary to what Mr Wolf suggests and to quote Hemingway: “How did you go bankrupt?”
“Gradually, then suddenly.”
Mark A Sherman
San Francisco, CA, US
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