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Are automatic balancing mechanisms appropriate for private sector defined benefit pension plans?
No full textThe Swedish social security system contains a mechanism referred to as an automatic balancing mechanism (ABM) that adjusts the rate credited to contributor accounts and the amount of increase in pensions in payment when liabilities exceed assets. The Swedish social security system also includes some other adjustment features including adjusting annuity factors to reflect, in part, improvements in cohort mortality and crediting accumulations (and to a certain extent pensions in payment, as will be explained in the paper) with the rate of growth in average wage per capita, thus connecting the growth in contributions and pensions to economic growth. The German social security system adjusts benefits by a sustainability factor that has been calculated to maintain long?term contribution rates within a certain range.The above description of Sweden’s social security applies to the component of the system that is Notional Defined Contribution (NDC). The German system, as it has been modified, could be considered to be quasi NDC. Mathematically, NDC and career?average?earnings defined benefit (DB) plans are similar.This paper considers the question of how the adjustment mechanisms described for the Swedish and German social security systems might be incorporated into private sector DB plans of the following types: multi?employer and single employer. The paper will argue that such adjustment mechanisms may be appropriate in multi?employer pension plans and will present innovative ways in which DB multi?employer pension plans could incorporate adjustment mechanisms. However, the paper argues that adjustment mechanisms are inappropriate in private sector single employer pension plans. The paper does present a modified approach to designing single employer pension plans that combines an employer?paid DB benefit and an employee?paid contribution account that would enhance financial sustainability and provide employees with greater flexibility
Some Guiding Principles for the Development of Self-Adjusting Mechanisms for Sustainable Retirement Systems
No full textMost of the developed countries are experiencing fertility rates below populationreplacement levels and increasing life expectancy. These demographic factors areexerting a financial strain on the delivery of social security retirement benefits. Inresponse to these and other pressures, some countries have adopted mechanisms thatare designed to make the system self-adjust, so that it is sustainable. A sustainablesystem is one that delivers on its financial commitments in such a way that thefinancial burden is borne equitably by participants over the long term. Based on areview of the analysis of the self-adjustment mechanisms of Canada, Germany, Japanand Sweden, this paper derives five guiding principles for the development of selfadjustmentmechanisms for sustainable social security retirement systems. The list isnot presented as complete, but is a starting point for those designing or adoptingadjustment mechanisms and for researchers
A framework for enhancing the management of multi-employer pension plans
No full textThe current framework in Canada in which collectively-bargained, private-sector Multi-Employer Pension Plans (“MEPPs”) operate is difficult for a number of reasons including:•The Administrator (i.e., the Trustees) has no control over the contribution flow•Industries and employers within industries are subject to economic and business cycles and employers may enter or exit the MEPP relatively easily, leaving the MEPP with long-term obligations•There is pressure to set benefits at levels that anticipate future investment returns and if such returns do not materialize as anticipated there can be severe financial implications for the plan•There are inherent conflicts of interests among classes of members such as active members who continue to be voting union members and retirees and terminated members who are no longer represented by the unionThe tools available for plan management include:•Governance structure•Plan design•Investment policy•Annuity purchases•Benefit reductionsThis paper builds on a previous paper entitled “Extending ERM To Multi-Employer Pension Plans” which was presented at the Society of Actuaries 2006 ERM Symposium. In addition to the ideas presented in that work, it discusses the question of whether MEPPs should be subject to solvency funding rules and the viability of a pension benefit protection fund offered by the private sector. It uses techniques of stochastic modeling to assess the financial viability of such a private sector pension protection fund
Are automatic balancing mechanisms appropriate for private sector defined benefit pension plans?
No full textThe Swedish social security system contains a mechanism referred to as an automatic balancing mechanism (ABM) that adjusts the rate credited to contributor accounts and the amount of increase in pensions in payment when liabilities exceed assets. The Swedish social security system also includes some other adjustment features including adjusting annuity factors to reflect, in part, improvements in cohort mortality and crediting accumulations (and to a certain extent pensions in payment, as will be explained in the paper) with the rate of growth in average wage per capita, thus connecting the growth in contributions and pensions to economic growth. The German social security system adjusts benefits by a sustainability factor that has been calculated to maintain long-term contribution rates within a certain range. The above description of Sweden’s social security applies to the component of the system that is Notional Defined Contribution (NDC). The German system, as it has been modified, could be considered to be quasi NDC. Mathematically, NDC and career-average-earnings defined benefit (DB) plans are similar. This paper considers the question of how the adjustment mechanisms described for the Swedish and German social security systems might be incorporated into private sector DB plans of the following types: multi-employer and single employer. The paper will argue that such adjustment mechanisms may be appropriate in multi-employer pension plans and will present innovative ways in which DB multi-employer pension plans could incorporate adjustment mechanisms. However, the paper argues that adjustment mechanisms are inappropriate in private sector single employer pension plans. The paper does present a modified approach to designing single employer pension plans that combines an employer-paid DB benefit and an employee-paid contribution account that would enhance financial sustainability and provide employees with greater flexibility
Living to 100 and beyond in Canada with dignity
No full textBy 2031, life expectancy at birth may reach 82 years for Canadian males and 86 years for Canadian females. Approximately 3 percent of the Canadian population will be aged 85 or older, including an estimated 14,300 who will be aged 100 and over. Five in eight of those living at age 85 or older will be women and at age 100 and older, 4 in 5 will be women.These statistics suggest that the composition of the population in 2031 will be different from today. Unquestionably, medical discoveries, healthier nutrition and lifestyles, economic prosperity and social support systems have all contributed to the significant increase in life expectancy. But is living longer a desirable goal in itself; especially if it is accompanied by inadequate wealth and concerns regarding how to manage one’s savings, or loss of mental faculties and a requirement for institutionalization?This paper argues that living longer with dignity is what is desirable and also that this should be an objective in designing specific social support systems for the elderly. The paper identifies and discusses certain areas where dignity is lacking or where the likelihood of living with dignity could be enhanced, including:• Financial savings of the elderly, whether the extent of financial risk to which they are exposed is desirable, and the replacement of the Old Age Security (OAS) benefit, which today is a demogrant to applicants aged 65 and older, by a demogrant at triple the current level for applicants aged 85 and older to ensure that Canadians are not living without dignity solely due to financial hardship;• Certain alternative living arrangements, better integrated with communities, designed to enable the building and retention of social capital, to better support the future elderly population which will be dominated by females;• Those suffering from severe pain or mental illness, including those who are institutionalized who are unlikely to be living with dignity and to ever return to a life with dignity, and proposes that such individuals be able to receive medical assistance to end their lives, in circumstances defined by law.The paper contributes to the literature on social capital by defining life with dignity in terms of financial, social and human capital. It updates earlier work from the 1990s to show that the percentage of older women living on their own is likely to decline in the future
Requirements to make the housing asset a viable retirement asset
No full textA study published in June 2007 performed jointly by the Canadian Institute of Actuaries and the University of Waterloo, entitled Planning for Retirement: Are Canadians Saving Enough?, concluded that: two thirds of Canadian households planning to retire in 2030 are not saving adequately to meet necessary living expenses in retirement; and home ownership will help to narrow the gap in savings, but by itself, won’t be enough. This study referred to a report by Statistics Canada that showed that in 2005, 69.2 percent of Canadians aged 65 or older owned a home and 88 percent did not have a mortgage. The median value of equity in the principal residence for Canadians aged 65 and older was $163,400. From the foregoing, I conclude that:• many Canadians approaching retirement own a home, • the home and its value are an important part of retirement savings for many Canadians, and• over their period of retirement many Canadians will need to convert their home equity into retirement income at the same time determining where and how they will be domiciled.An ideal arrangement would be for home owners to be able to access the equity in their homes to provide retirement income, that the retirement income would be guaranteed to continue for as long as the home owner and the owner’s spouse lived, and that the housing asset could be sold or exchanged at any time during the retirement period to accommodate the individuals’ changing requirements. In theory, a reverse mortgage could be written to offer these features. However, in practice, the reverse mortgage permits only a fraction of the house’s appraised value to be borrowed and is priced in a manner that is unattractive to borrowers. Furthermore, there is no institution that seems particularly well structured to provide the ideal product.This paper examines the characteristics of an ideal product and the type of institution or institutions that would be well positioned to offer the ideal product. The characteristics of the ideal product include the market mechanisms necessary to permit protection against longevity risk, and risk spreading among financial institutions. The paper argues that a government agency should provide the no negative equity guarantee. With this risk removed form the private sector, pension plans that seek real estate investments could be part of the solution. In view of the recent bailout of Fannie Mae and Freddie Mac in the United States, any proposal to create real estate backed investments will be controversial. This paper shows that the proposed investment structure avoids some of the weaknesses that contributed to the need to bail out certain financial organizations. Although the proposed structure is specifically designed for the Canadian economic and regulatory environment, it is anticipated that the characteristics of the ideal product will have global application and the characteristics of the facilitating institutions identified will be helpful to foreign researchers in considering the design of an institution structure that would be appropriate to deliver an attractive reverse mortgage product in their country.<br/
A model for better governance and greater stability of collectively-bargained Canadian pension plans using a multiple employer structure
No full textThis report deals with the Canadian pension regulatory environment and specifically Ontario. It proposes that unrelated employers be permitted to amalgamate their pension plans into a single plan using a multiple-employer structure, provided that all of the members of the single plan are represented by a union and the union has consented to the arrangement. It provides recommendations on how plans adopting this multiple-employer structure should operate in order to ensure that risks are appropriately allocated among stakeholders and that that there is strong governance.The pension formula would be defined benefit. The basic structure of the plan would be that the participating employers are required to contribute at a negotiated cents-per-hour rate based on the hours worked by covered employees. This would be the only financial obligation of the participating employers. The legal Administrator of the plan would be a joint board of trustees. There are a number of problems with the way in which Canadian multi-employer pension plans that are jointly trusteed and that are of the defined contribution – defined benefit type operate, especially with respect to governance. This paper makes a number of recommendations to improve plan governance, including only selecting independent experts to act as trustees and the compensation of trustees. In order to ensure the security of member benefits, the benefit formula would specify an ultimate benefit. With respect to the ultimate benefit, very conservative investment strategies would be employed and the benefit would be funded on a risk-free basis. Excess benefits would be provided to the extent that plan performance permitted. These excess benefits could be adjusted upward or downward depending on plan performance.This pension design would not be permitted in the current Ontario and Canadian regulatory environment. This report identifies a number of legislative and regulatory changes that would be required.The recommended plan is assessed using the measurement framework developed as part of the Retirement 20/20 project. The recommended approach scores very highly with respect to how risks are allocated. It also scores highly on governance.<br/
Requirements to make the housing asset a viable retirement asset
No full textA study published in June 2007 performed jointly by the Canadian Institute of Actuaries and the University of Waterloo, entitled Planning for Retirement: Are Canadians Saving Enough?, concluded that: two thirds of Canadian households planning to retire in 2030 are not saving adequately to meet necessary living expenses in retirement; and home ownership will help to narrow the gap in savings, but by itself, won’t be enough. This study referred to a report by Statistics Canada that showed that in 2005, 69.2 percent of Canadians aged 65 or older owned a home and 88 percent did not have a mortgage. The median value of equity in the principal residence for Canadians aged 65 and older was $163,400. From the foregoing, I conclude that:• many Canadians approaching retirement own a home,• the home and its value are an important part of retirement savings for many Canadians, and• over their period of retirement many Canadians will need to convert their home equity into retirement income at the same time determining where and how they will be domiciled.An ideal arrangement would be for home owners to be able to access the equity in their homes to provide retirement income, that the retirement income would be guaranteed to continue for as long as the home owner and the owner’s spouse lived, and that the housing asset could be sold or exchanged at any time during the retirement period to accommodate the individuals’ changing requirements. In theory, a reverse mortgage could be written to offer these features. However, in practice, the reverse mortgage permits only a fraction of the house’s appraised value to be borrowed and is priced in a manner that is unattractive to borrowers. Furthermore, there is no institution that seems particularly well structured to provide the ideal product.This paper examines the characteristics of an ideal product and the type of institution or institutions that would be well positioned to offer the ideal product. The characteristics of the ideal product include the market mechanisms necessary to permit protection against longevity risk, and risk spreading among financial institutions. The paper argues that a government agency should provide the no negative equity guarantee. With this risk removed form the private sector, pension plans that seek real estate investments could be part of the solution.In view of the recent bailout of Fannie Mae and Freddie Mac in the United States, any proposal to create real estate-backed investments will be controversial. This paper shows that the proposed investment structure avoids some of the weaknesses that contributed to the need to bail out certain financial organizations. Although the proposed structure is specifically designed for the Canadian economic and regulatory environment, it is anticipated that the characteristics of the ideal product will have global application and the characteristics of the facilitating institutions identified will be helpful to foreign researchers in considering the design of an institution structure that would be appropriate to deliver an attractive reverse mortgage product in their country
Book review: pension reform: issues and prospects for non-financial defined contribution (NDC) schemes
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