Conference Presentation, Panel
Pension Funds and the Economics of Retirement: Demographics Drive Evolution
- Defined benefit pension plans in the US are expected to see funding levels for 418 Fortune 1000 companies rise to 93% and the Milliman 100 Pension Funding Index reach 95.2% by the end of 2013, driven by 2013 performance.
- Longevity increases and medical advances are anticipated to raise retirement costs, while demographic and market shifts are expected to make existing retirement savings institutions less effective, though half the US population could be secure within a generation if changes permit.
- Defined benefit plans are projected to remain significant over the next 20 to 30 years, particularly for professionals within 10 years of retirement, with 75 million Americans still holding such plans despite a two-generation decline in market share.
- UPS pension plan benefit payouts are expected to peak in 2033 or 2034, while corporate plans generally hold funding in the mid to low 90th percentile, providing flexibility to manage volatility in declining interest rate environments.
- Ontario Teachers Pension Plan is expected to maintain full funding status with the flexibility to adjust contribution rates and implement conditional inflation protection to restore funding levels if market conditions deteriorate.
- Defined benefit programs are projected to generate 1.5% greater long-term returns than 401k plans due to scale, sophistication, and access to private equity and infrastructure, potentially offsetting individual under-provision for longevity.
- The cost of running defined benefit plans is historically cited as 8% to 12% of payroll, requiring an 8.75% expected rate of return to ensure benefits and cushion future variables, though costs rise significantly if sponsors migrate to 100% fixed income options.
- Hybrid plans designed to adjust benefits based on market performance comprise 40% of private sector defined benefit participants, while dynamic asset allocation models are expected to help plans approach 100% funding with reduced volatility.
- Corporate pension challenges are characterized more by market volatility than final outcomes, with urgency required to address intergenerational transfer risks in plans where benefits are fixed after being granted.
- The retirement system is expected to remain voluntary with nearly $19 trillion in savings, though a shift in funding burden to individuals occurs as employer contributions to defined contribution plans fall below historical defined benefit costs.
- Employers may be incentivized to exit defined benefit plans due to tax-deferred advantages of defined contribution plans, potentially dumping responsibilities on employees rather than purchasing annuities, which can cost a corporation 15% more in present value than lump sum distributions.
- Longevity pooling is expected to reduce the need for individual over-saving by estimating lifespans across hundreds of thousands of lives, countering the tendency for individuals to underestimate longevity in defined contribution systems.
- Canadian direct investing models in alternatives are considered exportable only if proper governance and compensation structures are established, while custom beta equity portfolios are expected to generate 85% of broad market returns with better downside protection.
- Pension funds are expected to continue serving as informed sources of capital for the long-term economy, including infrastructure and small businesses, with fixed income mixes likely changing over time if interest rates rise and funded status improves.
- Administrative burdens are projected to be lower for pension funds managing 300,000 participants compared to private accounts, and market mechanisms including single premium payouts and LDI strategies are expected to help employers manage risk.
- The government is expected to attempt to inflate its way out of debt problems, creating potential impacts for pension recipients, while the market for annuity purchases in defined contribution models remains a potential vehicle for security similar to defined benefit plans.