The Coming Pensions Crisis

Recommendations for Keeping the Global Pensions System Afloat

What’s your dream for retirement? Is it living on the beach, traveling on cruise ships throughout Europe, spending time with kids and grandkids, finally getting the chance to perfect your golf game? For a lot of people, the retirement dream is to retire early enough so that they can enjoy the fruits of their long working career while they’re still healthy and to live out their sunset years relaxing and enjoying the good life. However, the reality for many is that there isn’t enough money in the piggy bank to last throughout their retired life.

Workers in the past trusted that the defined benefit pension plans provided by their employers would keep them and their spouse living comfortably through their retirement. And if anything happened with their corporate pensions, they figured they had paid into government social security and it would be more than enough to cover things. Today’s workers are a bit less worry-free. With the rise of defined contribution plans, employees are being asked to manage their own retirement account which puts the onus on them to ensure they not only put enough away money for retirement, but also invest that money properly to get the best return. Improvements in healthcare are increasing life expectancies meaning retirement money needs to last much longer. At the same time demographic shifts — an increase in the retirement age population accompanied by a decrease in the working age population — are starting to put a strain on pay-as-you-go government schemes such as social security.

How much of a problem is it? According to our estimates, the total value of unfunded or underfunded government pension liabilities for twenty OECD countries is a staggering $78 trillion, or almost double the $44 trillion published national debt number. Corporations have also not consistently met their pension obligation and most U.S. and U.K. corporate pension plans remain underfunded with an aggregate fund status in the US of just 82%.

In the report that follows, the authors look at the scope of the pension problem both on the public and the private side. But instead of being all doom and gloom, they offer a set of recommendations to policymakers, corporate and public pension plan sponsors and managers, and product providers to deal with the crisis. These include: (1) publishing the amount of underfunded government pension obligations so that everyone can see them, (2) raising the retirement age, (3) creating a new system that utilizes Collective Defined Contribution plans which share both the risks and benefits of the plan between plan sponsors and individuals, (4) creating powerful ‘soft compulsion’ incentives to ensure that private pension savings increase, (5) encouraging pension plan sponsors to make their full pension contributions when they are due, and (6) encouraging corporates with frozen plans to get out of the insurance business.

Finally, the silver lining of the pensions crisis is for product providers such as insurers and asset managers. Private pension assets are forecast to grow $5-$11 trillion over the next 10-30 years and strong growth is forecast in insurance pension buy-outs, private pension schemes, and asset and guaranteed retirement income solutions.

With hope that we can still avoid a pension crisis, I’m not giving up on my Hawaiian shirt just yet.