#defined benefit

IBM has reopened its defined benefit plan to use the plan’s surplus – rather than corporate cash – to fund retirement contributions.

This shift has been fueled by a more favorable regulatory environment and the improved funded status of defined benefit plans.

While using “trapped surpluses” helps the firm, workers may well come out behind unless the gains are shared.

Interestingly, the analysis finds that only a handful of other large companies are likely candidates to follow IBM’s lead.

Thus, the move should be viewed as a financial maneuver, not a meaningful change in the provision of retirement income.

Liability-driven investing (LDI) is an investment strategy that aims to align the investments of a pension fund or other institutional investor with the liabilities or obligations it is expected to meet. In other words, LDI seeks to match the assets held by the investor with the timing and characteristics of the cash flows it is expected to pay out. The goal of LDI is to manage risk by ensuring…

Studies show that retirees have tended to draw down their financial wealth very slowly.

But these retirees generally had defined benefit (DB) pension plans, which pay benefits for life.

Hence, this slow drawdown pattern may not hold for new retirees, who rely on 401(k)s.

Indeed, the analysis finds that households with a DB plan retain more of their wealth – that is, they draw it down more slowly than those with a 401(k).

For example, a household retiring with $200,000 in savings and a DB plan would retain $28,000 more wealth at age 70 than a similar household with no DB plan.

The analysis suggests that many new retirees could deplete their 401(k) assets by age 85, meaning that they face a greater risk of outliving their savings.

लॉन्ग टर्म में फायदेमंद: EPF के लिए सरकार का बड़ा सुझाव, योगदान और निवेश के हिसाब से बेनेफिट वाला सिस्टम अपनाना सही

Hindi News Business To Keep EPFO Viable, Defined Contribution Should Be Adopted, Government Deposed To Committee Ads से है परेशान? बिना Ads खबरों के लिए इनस्टॉल करें दैनिक भास्कर ऐप 15 घंटे पहले कॉपी लिंक अभी क्या: डिफाइंड बेनेफिट वाले ट्रेडिशनल प्लान में रिटायरमेंट पर बेनेफिशियरी को सैलरी और सर्विस के साल पर पहले से तय पेंशन मिलता है नया क्या: डिफाइंड कंट्रिब्यूशन वाले सिस्टम में रिटायरमेंट…

“’When age 65 became the magic retirement number in the U.S., people didn’t live that long,’ said Catherine Collinson, the executive director of the Aegon Center and chief executive and president of the Transamerica Institute, a nonprofit organization that researches health and retirement.

“’Now many people may find themselves living to their 100th birthday. A 30-to-40-year retirement is very different than a 10- or 20-year retirement.’”

“The Aegon survey found that a new global retirement model would need to include universal access to a retirement savings system for workers, greater financial literacy, and affordable health care, among other solutions.”

“’What is most striking is that in every country, policymakers, employers and everyday people are grappling with the implications of aging populations,’ Ms. Collinson said. ‘Even though the countries are very different in their own way, everything from culturally to the nature of the inner workings of their retirement system, they all share the same challenges and the same problem going forward.’”

The New York Times, December 4, 2018: “Why the World Needs to Rethink Retirement,” by Katie Robertson

The New Social Contract: A Blueprint for Retirement in the 21st Century contains in-depth analysis, country comparisons, case studies and detailed recommendations. The report is based on findings from the 7th Annual Aegon Retirement Readiness Survey, which is based on a survey of 14,400 workers and 1,600 retired people in 15 countries: Australia, Brazil, Canada, China, France, Germany, Hungary, India, Japan, the Netherlands, Poland, Spain, Turkey, the U.K., and the U.S. The online survey was conducted in respondents’ native languages between January 29 and February 19, 2018. The survey is a collaboration among Aegon Center for Longevity and Retirement and nonprofits Transamerica Center for Retirement Studies® and Instituto de Longevidade Mongeral Aegon.

Milken Institute, 2018: “A New Social Contract for Retirement,” by Catherine Collinson 

Aegon, Centre for Longevity and Retirement, 2018: The New Social Contract: a blueprint for retirement in the 21st century: The Aegon Retirement Readiness Survey 2018 (72 pages, PDF)

Pooled-risk Pensions for Canada?

[”W]hen it comes to retirement income, DC plans lack one important element: They don’t actually provide pensions. It’s up to the individual to manage a pot of money so it lasts for the rest of their (probably long) lives – and most seniors don’t have the necessary skills or desire to take on that challenge.”

“The good news is, there’s a great option that would give these Canadians a more financially secure retirement: the pooled-risk pension.”

“But here’s the bad news, it’s been blocked by legislation. That’s why we at the National Institute on Ageing at Ryerson University, along with leading seniors’ and pension advocacy organizations across Canada, have come together in an unprecedented coalition. In a letter to Finance Minister Bill Morneau, we formally asked the Government of Canada to change the legislation and allow workplace DC plans to offer pooled-risk pensions to their members.”

The Globe and Mail, January 15, 2019: “Pooled-risk pension plans would give many Canadians a more financially secure retirement ,” by Bonnie-Jeanne MacDonald

It appears that many if not most people think that pensions are a benefit that employers pay to employees, when they are actually a loan from the employees to their employers, to be repaid after retirement. An example:

An employer is willing to pay an employee $40,000 a year, altogether.

The employee may for example want to set aside $10,000 a year of those $40,000 and lend them to some investment fund that will pay back the loans, with interests or profits, after retirement.

The company may then offer a deal: lend us the $10,000 a year by taking a base salary cut of 25%, and we shall pay back that loan after you retire.

Assuming that the employee works for 40 years and is expected to be retire for 20 years, that means that overall the employer will receive a loan of $400,000 over 40 years, and will pay that back $20,000 a year for 20 years.

Actually the employee will want some interest for that loan, and therefore likely they will ask for example for $500,000 back, or $25,000 a year.

That means that the employeee will have a gross income of $40,000 during their work life, of which they will be able to spend $30,000 a year, and will have a retirement income of $25,000, or 62.5% of their work income.

The scheme described above is in effect that of defined benefit pensions, and the $10,000 per year loaned to the employer by the employee is called the "pension contribution" (and is sometimes formally split between employer and employee, which is just an euphemism).

Employers have found advantageous to borrow from their employees because this drastically improves their cash flow until the employee retires, and they hope to fund, with the money borrowed from their employees, investments that have a return rate higher than the rate of interest they are (implicitly) paying on their borrowing from their employees.

The switch to defined contribution pensions, in which the employees lend their pension contributions not to their employers but to a third party investment account, is actually disadvantageous for the employers, however most employers have chosen to do it, for another reason: they keep the base salary of $30,000 in the example above unchanged, and then pay not $10,000 but $3,000 in the employee's investment account, that is they never pay back to the employee the other $7,000 per year they are "borrowing".