The most obvious effect of ultra-low yields is that they have pushed defined-benefit schemes into big deficits. The Pension Protection Fund estimates that, at the end of June, the combined deficit of the 5,945 schemes it covers was £383.6bn; in 2011 the schemes were in surplus. This runs the risk that firms will close even more final salary schemes, or hold down either wages or dividends to reduce these deficits - responses which will hurt all savers.
You might object that these deficits are an artefact of accounting rules: low gilt yields mean that the discounted present value of schemes' future liabilities is enormous.
This objection misses the point that there's a real and nasty problem here not just for company pension schemes but for anybody saving for retirement - especially younger savers.
The problem's simple. Gilt yields are low in part because investors anticipate weak economic growth for years. If they're right, this means low returns on all assets - equities as well as gilts. And this means our savings won't grow very much, which means we'll have to save more to get a decent pensions pot.
For example, if returns on your savings over a 30-year period drop from 4 to 3 per cent you'll need to save 18 per cent more over those 30 years to end up with the same level of wealth. And this ignores the fact that lower annuity rates mean that this pot will buy you less income than your parents enjoyed.
This leaves you a nasty choice: either save more now and forego a lot of spending; or abandon hopes of leaving a bequest to your children so you can run down your wealth in retirement instead.
In fact, things are worse than this. We can’t all increase our savings in response to lower returns. As the paradox of thrift reminds us, attempts to do so would be self-defeating; if enough of us save more, aggregate demand falls and so we all become worse off and therefore less able to save.
You might object that the gilt market's expectations for future yields might well be wrong. As Maynard Keynes said: "Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible." True. But this only deepens our problem. If secular stagnation intensifies, causing asset returns to be even worse than expected, we'll end up saving too little. But if it relents and investment returns improve some of us will have saved too much, thereby needlessly depriving ourselves of some good times - perhaps by not starting families.
For these reasons, negative real yields impose a massive burden upon today's younger people, who are already suffering from falling real wages and unaffordable housing.
This problem cannot be solved by individuals. The sheer uncertainty of long-term returns makes it impossible to know how much to save. And the paradox of thrift warns us that attempts to save more will be collectively self-defeating.
Herein lies a role for government. Although negative real yields are a menace for savers they are great for the public finances because they mean that the real burden of government debt will fall over time. A 20 year index-linked yield of minus 1.4 per cent implies that £100 of debt will shrink to £75 in 20 years' time.
This means the government is better placed than individuals to bear the risk of providing for future pensions. This is true in other ways. One is simply that the government can pool risk better than can individuals.
But there's something else. There's little correlation between equity returns and GDP growth. Shares are unreliable as a claim upon future GDP; even if (against expectations) the economy grows well, this growth may accrue to unquoted businesses or ones owned by foreign investors rather than to listed companies. This creates another risk that our savings might not grow. State pensions protect us from this because the taxes from which they are paid are a stronger claim upon future GDP than are shares. (Remember that all future pension incomes must come from future GDP, whether they are state or private pensions or defined benefit or defined contribution schemes.)
There is, therefore, a strong case for pension saving being done collectively by the state rather than left to individuals.
To its credit, this is what the government is doing. The pensions "triple lock" - the promise to raise the state pension by the higher of inflation, wage growth or 2.5 per cent - ensures that it will rise in real terms over time. The power of compounding means that this is of more benefit to today's savers than it is to current older folk. In effect, this shifts the burden of providing future pensions away from the private sector towards the state - which is just what we need.
