Pension Risk Trends: Companies, Governments, Accounting, Oh My
Pension Risk Trends: Companies, Governments, Accounting, Oh My, by Claude Penland
Risks Abound, Including Longevity Risk, Accounting Risk, Investment Risk and Legal Risks
We’re going to review some pension risk trends in the market.
Improvements in life expectancy are costing retirement benefits providers a lot in unanticipated pension costs. However, Pension Insurance Corporation (which named a new Chief Actuary) just succeeded in getting reinsurers to participate in covering $800 million in longevity risk.
Companies have been selling bonds to cover their pension costs and contributions. These companies include the United Parcel Service and Northrop Grumman. The Pension Benefit Guaranty Corp was closing in on a record deficit.
Some states, including Illinois, have also recently sold bonds. New Jersey’s promised public pensions are estimated to be deficient by at least $46 billion. San Diego city workers are looking at potentially reduced pensions because of mispriced benefits based on buying extra years of credited employment. San Jose voters were willing to accept some measure of pension reform, while San Francisco voters were not.
Some prominent investment consultants and actuarial firms have decided to no longer provide advice to these public sector pension plans, judging the legal and financial risks to be too great. Public plans’ questionable accounting is also a long-term risk.
There was an $800 million jump in accrual retirement costs for the Navy, Army, Air Force and Marine Corps.
Canadian commentators were discussing raising the retirement age to reduce pension costs.
New European insurance regulations, dubbed “Solvency II”, threaten to also affect European pension funds’ investment policies and potential flexibility. Germany in particular has been on the cutting edge of liability-driven investing. Some pension funds had been purchasing a material amount of emerging market debt.
Nyhart Actuaries designed a new type of 401(k) plan, while the Society of Actuaries determined ten barriers to retirement planning advice.
Where there is risk, there is opportunity. Asset management firms are continuing to be started up. SECOR Asset Management was started by alumni of Goldman Sachs Asset Management and Promark Global Advisors. Several Big 4 firms intend on expanding their pension advisory practices. Allianz Corporate Pensions Advisors was to be launched in Germany. Some funds, such as CalPERS, have sought Risk Officer-level help.
There also has been M&A activity, such as Trion being sold to Marsh. Traditional benefits consulting firms should expect additional mergers and acquisitions.
Websites such as MallowStreet.com and PensionRiskNews.com have recently been established to support the pensions community.
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