Pension/Retirement Plan Reform
One of the interesting topics at the CFA conference that I recently attended was the topic of required pension changes to be implemented urgently with the accelerated unraveling of the defined benefit (DB) plans, the misapplication of the defined contribution (DC) plans and the often mentioned inadequately funded Social Security liabilities.
At a Pension Roundtable, Messrs. Ambachtsheer, Ezra and Waring took turns to push their respective perspectives and while on the podium there appeared to be significant disagreement.
Ezra was pushing to fix the current weaknesses of both DB and DC. Some of the issues and fixes he mentioned were transparency of DB plan benefits also before retirement (I personally found it incomprehensible during my career), fair portability of the present value of the plan, DB plan benefits fully funded at all times, default is to participate, in DC plans use of target maturity date funds for investment, allow or set annuity as default for DC plans and at any time allow DC to be convertible to a deferred annuity.
Waring was on a mission to save DB plans which he sees are in danger of imminent extinction, except for government employees (which by the way are often reported to be massively under-funded due to unrealistic expected return rates, discount rates and actuarial assumptions). He wants to battle the perception that DB plans funding/cost risks are not manageable and dismisses the argument the replacing them (as is common nowadays) with DC plans is the answer. DC plans seldom grow large; at retirement the median plan is $44K while the average plan is $140K (of course things may be somewhat better, as many individuals have more than one plan). He argues that the “worst DB plans are better than the best DC plans”.
And, Ambachtsheer advocated for TOPS (The Optimal Pension System), which he defines as: auto-enrollment, auto-adjusted contribution levels, auto-age-adjusted investment policy, possibly even suggest deferred retirement date (if accumulated funds are insufficient).
In reality, I thought there was violent agreement among them on value of: (1) mortality risk sharing, (2) potentially higher returns and lower costs with arms-length professional management with plans that have scale, (3) properly designed default participation schemes, (4) transparency, (5) portability, (6) fully funded pension plans, and ideally (7) as in Australia, New Zealand and Holland, covering the entire workforce with inflation indexed annuity/pension.
All this sounds revolutionary, but some of the features were implemented in recent U.S. pension reform legislation and no doubt the pressure will grow to do more. Sounds revolutionary, but may work if we learn from all the past regulatory and actuarial errors. Once again Canada is trailing the U.S. in dealing with the issues. Solving the pension crisis is in the public interest. It requires public policy changes, if not public solutions (given that the longevity risk may be too much to bear by private companies at reasonable cost)
The January/February 2007 issue of Financial Analysts Journal is dedicated to retirement plans related articles, including one by each of the three participants of the Pension Roundtable.
At a Pension Roundtable, Messrs. Ambachtsheer, Ezra and Waring took turns to push their respective perspectives and while on the podium there appeared to be significant disagreement.
Ezra was pushing to fix the current weaknesses of both DB and DC. Some of the issues and fixes he mentioned were transparency of DB plan benefits also before retirement (I personally found it incomprehensible during my career), fair portability of the present value of the plan, DB plan benefits fully funded at all times, default is to participate, in DC plans use of target maturity date funds for investment, allow or set annuity as default for DC plans and at any time allow DC to be convertible to a deferred annuity.
Waring was on a mission to save DB plans which he sees are in danger of imminent extinction, except for government employees (which by the way are often reported to be massively under-funded due to unrealistic expected return rates, discount rates and actuarial assumptions). He wants to battle the perception that DB plans funding/cost risks are not manageable and dismisses the argument the replacing them (as is common nowadays) with DC plans is the answer. DC plans seldom grow large; at retirement the median plan is $44K while the average plan is $140K (of course things may be somewhat better, as many individuals have more than one plan). He argues that the “worst DB plans are better than the best DC plans”.
And, Ambachtsheer advocated for TOPS (The Optimal Pension System), which he defines as: auto-enrollment, auto-adjusted contribution levels, auto-age-adjusted investment policy, possibly even suggest deferred retirement date (if accumulated funds are insufficient).
In reality, I thought there was violent agreement among them on value of: (1) mortality risk sharing, (2) potentially higher returns and lower costs with arms-length professional management with plans that have scale, (3) properly designed default participation schemes, (4) transparency, (5) portability, (6) fully funded pension plans, and ideally (7) as in Australia, New Zealand and Holland, covering the entire workforce with inflation indexed annuity/pension.
All this sounds revolutionary, but some of the features were implemented in recent U.S. pension reform legislation and no doubt the pressure will grow to do more. Sounds revolutionary, but may work if we learn from all the past regulatory and actuarial errors. Once again Canada is trailing the U.S. in dealing with the issues. Solving the pension crisis is in the public interest. It requires public policy changes, if not public solutions (given that the longevity risk may be too much to bear by private companies at reasonable cost)
The January/February 2007 issue of Financial Analysts Journal is dedicated to retirement plans related articles, including one by each of the three participants of the Pension Roundtable.
RetirementAction.com 
Perhaps DB Plans from the private sector should have a upper limit….say 80-85 years then the social system would kick in …if and only if the recipient requires future assistance….thus leaving the DB sponsers with a maximum calcuated liablity on the upper end..
DB Plans would probably be in a much better shape if the government of the past and did’t allow sponsers to remove excess funds and take breaks/holidays from their obligations….and then to boot have actuaries not understand and report the dire consequences of such actions over a long period of market conditions(up/downs–minor major recessions)