Pension Plans and the Low Interest Rate Environment ... · PDF filePension Plans and the Low...
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Pension Plans and the Low Interest Rate Environment Presented by: Shelley Engman BC Pension Forum March 2013
Transcript of Pension Plans and the Low Interest Rate Environment ... · PDF filePension Plans and the Low...
Pension Plans and the LowInterest Rate Environment
Presented by: Shelley EngmanBC Pension ForumMarch 2013
Low Interest Rates are Painful for Pension Plans
Solvency valuations Higher contributions
Accounting valuations Lower profits
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved 1
But Rising Interest Rates Will Be Painful Too….
*10-year bond, return in year 1.
…. and higher interest rates won’t mean plans are cured….
Coupon Return
Capital Return
Total Return
Example 1—Declining interest rates (6% to 5%)
6% 7% 13%
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved 2
Example 2—Rising interest rates (6% to 7%)
6% -7% -1%
Because the Future Doesn’t Look as Bright as the Past
The Past
Investment Returns Generous
Longevity Shorter
Plan Resilience High
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved 3
The Future
Muted
Longer
Low
-18%
-13%
-8%
-3%
2%
7%
12%
17%
22%
27%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Total Pension Fund ReturnsRolling 3-year Average vs. a 7% Assumption
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved 4
Life Expectancy has Improved
Life expectancy at birth for Canada, US and UK:
Source: The Human Mortality Database
Canada—a healthier place to live?
20 year increase in life expectancy in
a lifetime!
60
65
70
75
80
85
Canada
US
UK
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved 5
Longevity Risk
Underestimating longevity means:— Plan liabilities are understated— Past contributions were insufficient— Future contributions need to be higher
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved 6
Pension Balance
BenefitsContributions
+ Investment
Income
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved 7
Since the Future Doesn’t Look as Bright as the Past, Balance Must be Re-Calibrated
Plans that were balanced under 7% return assumptions are no longer balanced under 5% return assumptions
To restore balance, something must change: contributions, benefits or both
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved 8
Long Term Sustainability
A Sustainable plan is one that can consistently, through both favourable and adverse circumstances, deliver an appropriate rangeof benefits within an acceptable range of costs
Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved
Acceptable range of costs
Appropriate range of benefits
Reduce asset/liability mismatch risk
Benefits
Contributions+
Investment Income
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Shared Risk Models Are Emerging
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Retirement Income Delivery Models
Traditional Defined Benefit
Sustainability Zone: shared contribution/benefit risk
lifetime pension risk pooling/efficiency
Traditional Defined
Contribution
Protecting Your Plan—for the Long Term
11Pension Plans and the Low Interest Rate Environment.pptAon Hewitt | © Aon Hewitt Inc. 2013—All Rights Reserved
