Views on improving the integrity of global capital markets
28 February 2014

Global Pension Crisis: Looking to Global Pension Plan Designs for Possible Solutions

Posted In: Uncategorized
Global Pension Crisis

The fact of the global pension crisis is not news: across the globe, there has been ample media attention to the impact of demographics, a prolonged low interest rate environment, disappointing investment returns, and political shenanigans that have conspired to leave many ill prepared for the financial obligations of their latter years. At the heart of the issue is how much responsibility individuals should assume for providing for their financial well-being, and how (or whether) governments can backstop personal investing.

Acknowledging the problems and fixing them are two entirely different propositions, and definitive solutions still are elusive. But JP Morgan Asset Management’s Paul Sweeting, CFA, contributes to a better understanding of the issues and potential solutions with his recent paper The Future of Pensions: A Plan For Defined Contribution. Sweeting reviews the basics of demographic pressures, including a look at old-age dependency ratios (the proportion of the population aged 65 or over to the proportion aged 16–64, a good proxy for a society’s ability to “pay as you go” to support retirees). Beyond the usual dimensions of fertility rates and expected longevity, Sweeting considers the impact of long-term immigration on improvements in the old-age dependency ratio — food for thought in the United States as the immigration reform debate continues.

The paper’s review of a variety of European approaches to pension plan design is very useful in advancing ideas that may form the basis of a sustainable future system. Annuitization figures prominently in the current and potential future landscape, allowing pensioners to convert assets to a predictable stream of income that they can’t outlive and limiting their ability to outspend their retirement assets in the early years of retirement. But annuities can suffer from expensive structures and capital charges that erode their power, and also contradict the common impulse to try to provide for heirs with a so-called “bequest motive” of individuals.

Drawing in particular on the example of the Danish system, Sweeting imagines a future basic system that combines a mandatory contribution within a specified band of compensation to buy fixed, collective deferred annuities as well as fund a “growth” component that would invest more aggressively to fund increases in annuity payments if possible (reflecting inflation adjustments or longevity increases, for example). Annuities structured with provisions for cash flows for spouses and children (as in Switzerland) could help overcome objections borne in bequest motives. Sweeting also proposes a supplementary level of benefits, funded with optional payments drawn from income beyond the specified band for the basic mandatory contribution. This would fund a decumulation fund designed to pay benefits from 20 years from the time of retirement and purchase advanced deferred annuities to provide payments after 20 years from retirement. The cost of such advanced deferred annuities is much more reasonable, and a small allocation to a more aggressive investment program could help enhance the deferred annuity benefit.

Much of Sweeting’s proposal depends on collectivizing both contributions and decumulations, and as he notes, the merits of such an approach may run counter to cultural and societal values in nations that would make such a design difficult at best. For a problem of this size and importance, however, the need is for actuarial and investment experts, employers, and politicians not to talk past each other. It is necessary for all concerned to consider the best of a variety of experiences, as well as to acknowledge explicitly the difficult choices to be made. Sweeting’s article does a good job of pointing us in that direction.

If you liked this post, consider subscribing to Market Integrity Insights.

Photo credit: iStockphoto/Marchcattle

About the Author(s)
Bob Dannhauser, CFA

Bob Dannhauser, CFA, was the head of global private wealth management at CFA Institute.

4 thoughts on “Global Pension Crisis: Looking to Global Pension Plan Designs for Possible Solutions”

  1. William Slater says:

    Great, new plans from the criminal bankster’s to loot the savings of hard working people. If the markets were not criminal, mafia run casinos, one could use “analysis” and invest intelligently and would have no need for the so-called “governments” help (problem reaction solution anyone)!.

    Sadly, it is impossible to “invest” in the macro markets because the criminal mafia run by the likes of JP Morgan and Goldman Sachs have rigged it in their favor at the expense of the masses. The cruel side effect of all of this is one cannot even invest locally anymore because the distortions created by the criminal bankster’s not only distorts global markets, but now, local markets as well. The criminal paper pushing has completely destroyed the free markets? Why is economics even taught anymore? Why not just teach business graduates how to commit accounting fraud, propaganda, and market rigging?

    The bottom line is because the bankster’s have hijacked the government via the progressives, liberals, democrats, socialists, collectivists, and now, the republicans as well, the moral hazards created are too great to reconcile. Many say only a collapse will fix the problem, but the psychopaths and sociopaths that run the most corrupt financial system in the history of mankind have better plans: more looting!

    And as for the CFA Institute? Well, like the education system at large and other “watchdogs” who should have called the bankster’s out, they instead get spoils from the bankster’s to overlook the widespread accounting fraud and other criminal behavior that separates the masses from not only their money and labor, but their freedom as well. Yes, you are not just stealing our money—you have stolen our lives and no amount of denial will change that!

    The criminals that run the banking system have destroyed humanity—-you can create new “schemes” to perpetuate the Ponzi scheme but it doesn’t change the underlying facts!

    I know, just a conspiracy—–the reason people don’t have money to retire is their own fault. Has nothing to do with being constantly robbed, cheated, lied to, and manipulated—that is just a conspiracy.

    I don’t see how financial “professionals” can write articles like this with a straight face. The only thing that is certain is that real “evil” exists—anybody that can “rationalize” the looting of people’s savings and thus their freedom to live is the very definition of evil. You can justify and rig the numbers all you want, but at the end of the day theft is theft.

    This article should be renamed “Global Pension Crisis: Criminal Bankers Looking for New Ways to Loot the Population and Enslave Them”!

  2. Alexia Victoria Kalogeropoulou, CFA. says:

    The simple solution:
    Prohibit short-selling in the primary market.
    Interest rates will ‘normalize’, the printing presses will stop.

    100 shares in issue.
    10 on loan to a short-seller.
    Implies 110 shares in issue, artificially depressing EPS.

    Should not be legal.
    110 shares not freely available to sell at point of sale.

  3. Bob Dannhauser, CFA says:

    Thanks for your comments. @WilliamSlater you make some sweeping allegations that I disagree with, but I do agree that to the extent that investors share views that approach yours regarding the integrity of capital markets, the essential societal purposes of capital markets are at risk. I reject your assessment of the role of CFA Institute; even a casual read of the Code of Ethics and Standards of Professional Conduct that CFA Institute members, CFA Institute charterholders, and candidates for the charter are all required to abide by demonstrates our commitment to ethical conduct in our profession. And we call out those few who fail to abide by these high standards ( Further, we devote considerable effort to working with standard setters and regulators worldwide to bolster financial market integrity (see for an overview). And our Future of Finance initiative ( works to consider transformative responses to the systemic issues of our time. We’re not alone in these kinds of efforts, and improvements to the integrity, efficiency, and effectiveness of capital markets will require the combined efforts of regulators, practitioners, and investors. Don’t write the system off for its flaws, real or imagined: help develop and deliver the kinds of solutions that fulfill the potential for capital markets to serve society well.

  4. Alex Durbin says:

    Whenever I see “bankster” in a comment on a thread pertaining to finance I immediately assume the writer to be a dunce. It adds nothing to the discourse and makes a person seem incredibly foolish.

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.