Post on 25-Dec-2015
ANNA RAPPAPORT CONSULTING
STRATEGIES FOR A SECURE RETIREMENTSM
US Pensions: Today’s Challenges, Tomorrow’s Direction
Anna Rappaport, FSA, MAAASenior Fellow on Pensions & Retirement,
The Conference Board (US)
2009 Summit on the Future of Pensions: From Crisis to Sustainability
April 2009
2009 Summit on the Future of Pensions: From Crisis to Sustainability
Agenda
Today’s Challenges Tomorrow’s Direction
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Today’s Challenges
Big picture Successes and failures DB/DC evolution DB and the Financial Crisis DC and the Financial Crisis
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Big Picture
Social Security key Employer role
– Private large companies – big– Small companies – limited– Public sector – nearly everyone covered (mostly DB)
Retirement – later and more gradual Limits on individual action No consensus among stakeholders about right answers No integrated policy background
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Successes and Failures: Different Perspectives
Successes Social Security benefits Retirees doing well – many
with DB income 401(k) plans
– Account balances
– Auto-enrollment and new defaults
Large plans well funded before the crisis
Public plans PPA strengthened system Benefits earned generally
paid
Failures Coverage gaps – small ERs,
part-time, job changers, etc. Inadequate savings 401(k) plans
– Account balances
– Using money too early Freezing of DB plans PPA punished previously well
funded plans in crisis Too many lump sums Inadequate response to
demographic change Social Security funding gap
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
DB/DC Evolution
Workers with pension coverage, by type of plan: 1983 to 2007
Year DB only DC only Both
1983 62% 12% 26%
1995 29% 56% 13%
2007 17% 63% 19%
Source: Center for Retirement Research, An Update on 401(k) plans: Insights from the 2007 SCF, March 2009
Notes:
• 55% of private sector full-time full-year wage and salaried employees have pension coverage
• DB plans widely used in public sector and for multi-employer plans (union – management sponsored)
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Pensions in the economic crisis - DB
Large private DB plans– From 12/2007 to 12/2008: 100% to 75% funded– 2009 contributions – 2X 2008 or more– Pension Protection Act(PPA) challenges
Big funding increases Under 80% funded – limits on lump-sum payments Under 60% – law requires freeze + benefit limits
PPA intensified the problems– Limited relief granted– Further relief requested
If no relief – expect more freezes Public sector – not subject to PPA
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Pensions in the economic crisis – DC
Little change in participation Some employers dropped/cut match – 3% dropped/8% cut
according to 12/2008 WorldatWork survey Creates challenges for more affluent near retirees and
already retired– Reduced 401(k) balances – average loss of 25%+ from
1/1/2008 to 1/20/2009 – accounts of $200,000+ and 56-65 year olds with 20+ years of service
– Many people need to work longer, but hard to do so – 4 out of 10 people retire earlier than planned
Shift to DC plans compounds issues for individuals
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
401(k) Plans in Perspective
Heavier reliance on default options Growth of auto-enrollment, life cycle funds in DC Advocates
– Big success/contribution to retirement security– % of participants taking hardship withdrawals under 2%
Voices of Critics – Too many people have been left out of the system– Too much risk and exposure to market swings– Lump sums at retirement– Leakage– Critical of investment options, expense disclosures– Tax benefits go largely to more affluent
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Tomorrow’s Direction: New Approaches
Big Issues and Themes Concerns of Employers and Employees Defining the Future: Players and Proposals Mandatory or Voluntary? Risk: Sharing and Management Later and Flexible Retirement Dealing with Realities of Individual Action
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Big Issues and Themes
Keep Social Security strong Coverage: Mandatory Tier II? Risk sharing – before and after retirement Risk management Governance and role of the employer Gradual retirement/faciliating work as part of retirement Payouts in DC plans
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Concerns of Employers and Employees
Employers Helping employees realize the
benefit of the funds they have accumulated
Securing retirement for employees
Managing fiduciary liability Winning loyalty and
appreciation from employees Supporting talent
management policy Keeping administration simple
and cost effective
Employees Housing and asset losses Timing of retirement Dealing with confusion Managing money in
retirement Finding good advice Being able to deal with
emergencies Leaving money to heirs Making money last Not losing money
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Defining the Future: Players and Proposals
U.S. Government ERIC (ERISA Industry Committee) – New Benefits Platform Projects focused on defining new models
– Society of Actuaries: Retirement 20/20– Retirement USA
Academics/think tanks– Auto-IRAs– New designs replacing current system on mandatory
basis
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Coverage: Mandatory Tier II?
Realities– Large private and public employers – very good
coverage and good benefits for long-term employees– Small employers – mostly out of the system
Social Security is universal program now
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Proposals for Mandatory Coverage
Auto-IRA – require employers who do not offer plan to offer auto-enrollment payroll deduction IRA– Enhance with tax credit/government matching?– Employees can opt-out
Replace current system with mandatory account based system– 2.5% to 5% of pay– Benefits as income– Various management alternatives – government
(Federal Thrift Plan) or private– Or offer as an option
Increase Social Security minimum benefits
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Risk sharing: before and after retirement
Risks include investment, longevity, health care, inflation, currency, business failure, fraud and more
Rethinking distribution of risk between plan sponsors, employees and public systems
Self-adjusting systems support pooling After retirement
– Growing use of lump sums in US
– Income based defaults not used in DC
Options for risk pooling – Potential risk poolers: social systems, employer DB plans,
independent pension entities, insurance and financial products, family
– Public systems, TIAA-CREF, examples of organizations that pool risk across employers
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Risk management
Financial crisis reinforces importance Total enterprise risk perspective Investment management – matching of assets/liabilities Right investment structures Self-adjusting systems Large enough pools Different kinds of risk pools Good governance – focus on identifying best models Plan design
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Redefinition of retirement
Will longer life mean longer work or longer retirement? The third age – new thinking about the life cycle People expect to retire later, but so far – few do About 50% work in retirement or have bridge jobs Virtually no formal phased retirement (private sector) 40% of people retire before they planned to
– Loss of job and poor health – major factors Many people say they want to work some in retirement
– Say vs. do conflict– Questions about availability of work– Big unknowns
Disability: key issue in thinking about this
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
When people retire: Pre-retirees expect to retire later than retirees, 1 in 3 say it doesn’t apply
Age categoryRetirees (%)
(n=400)Pre-retirees (%)
(n=401)
Under age 55 31 1
55 to 61 30 16
62 to 64 16 12
65 to 69 13 27
70 or older 4 6
Will not retire 1 1
Doesn’t apply 3 32
Don’t know 2 6
Source: Society of Actuaries, 2007 Risks and Process of Retirement Survey
How old were you when you retired or began to retire from your primary occupation?/At what age do you expect to retire from your primary occupation?
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
What people know and do
US savings rates are low People save much more when they have access to
employer plan Many gaps in knowledge about retirement
– Few think long term– Assets vs. expectations: out of step– Problems with math literacy, investment knowledge– Little focus on systematic risk management
Major method of managing risks– Reduce spending– Little focus on risk management products
Much changes during retirement, without pre-planning
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
16%
22%
26%
62%
11%
60%
21%
21%
34%
58%
8%
58%
If your spouse were to pass away before you/if you were to pass away before your spouse, do you think it would leave you/your spouse financially…? (Among married retirees and pre-retirees)
Better off
About the same
Worse off
Source: Society of Actuaries, 2007 Risks and Process of Retirement Survey
Example: Few believe they will suffer financially by their spouse’s death
Retirees(2007 n=261)
Pre-retirees(2007 n=299)
You, if your spouse were to pass away first
Your spouse, if you were to pass away first
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Employer roles in retirement income
Offer benefits and pay for them Offer programs for individual saving Provide plans that limit lump sums – can mandate income
for all of part of the benefit Serve as purchasing agent Offer access to pools Create expectations and provide information Advise and educate
Key questions – should employer offer benefits, facilitate them, or opt out? Should employer be primary source of security?
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
How and when benefits are paid
People say they want income but choose lump sums Distribution of benefits: lump sums vs. income
– DB: lifetime income common – DC: lump sums usual in US but growing concern as
these plans are primary Big issues:
– New defaults for DC plans– How to prevent leakage: how much early access should
be allowed and when?
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Example of Proposal: ERIC New Benefits Platform
Includes DB, DC and short-term savings component Mandates coverage, but allows employers to offer own
plans, use purchasing cooperatives, or provide vouchers Provides standard benefit designs Mandates individuals without employer coverage to buy on
their own Levels playing field between those with and without
coverage Extends same tax benefits whether employer plan or
individual purchase Mandates Income payout for DB benefit
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
Developing Options: Retirement 20/20
Society of Actuaries project – focus on new models Multi-disciplinary Started with stakeholders: society at large, individuals,
employers and markets Looked at risks, needs and roles Key findings – ideas for the future
– Align roles with capabilities– Support new patterns of retirement– Importance of self-adjusting systems– Signals matter– Governance matters
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
The Future – Some Dreams
Recognition of importance of organized retirement system Public will understand longevity including its variability Strong Social Security system Rational coherent policy structure
– Support employer role– Encourage range of plan designs
Encourage later retirement and facilitate work among third age persons
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2009 Summit on the Future of Pensions: From Crisis to Sustainability
More dreams
Self adjustment will facilitate risk pooling Sensible use of choice, with good default options Focus on life income Protect spouses and widows All stakeholders will recognize the importance of the post-
retirement period DC plans use distribution defaults that encourage income Culture will encourage more saving Adequate retirement funds to cover post-retirement inflation
and the cost of long term care Benefits available on disability retirement
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anna@annarappaport.comPhone: 312-642-4720
Fax: 312-642-4330
ANNA RAPPAPORT CONSULTING
STRATEGIES FOR A SECURE RETIREMENTSM
anna@annarappaport.comPhone: 312-642-4720
Fax: 312-642-4330
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