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Risk

Eight Largest Pension Systems Will Have $400 Trillion Gap by 2050    

World Economic Forum warns of “imperiling the incomes of future generations.”

By Michael Katz

The eight largest pension systems in the world will have a combined shortfall of $400 trillion by 2050, which is “setting the industrialized world up for the biggest pension crisis in history,” according to a white paper from the World Economic Forum.

“The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change,” said Michael Drexler, head of financial and infrastructure systems at the World Economic Forum. “We must address it now or accept that its adverse consequences will haunt future generations, putting an impossible strain on our children and grandchildren.”

The white paper, titled “We’ll Live to 100 – How Can We Afford It?” calculates the impact of aging populations on the pension gap in the world’s largest pension markets: the US, UK, Japan, the Netherlands, Canada, Australia, China, and India.  The US, which has the largest gap among those countries, currently has a $28 trillion shortfall that the World Economic Forum projects will grow to $137 trillion by 2050. The average gap in those countries, excluding China and India, is projected to reach $300,000 per person.

The white paper suggests five ways governments can adapt pension systems to address the shortfall:

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  • Increase Retirement Age In Line With Life Expectancies – For countries with the highest life expectancies, such as the US, UK, Canada, and Japan, a real retirement age of at least 70 should become standard by 2050.
  • Make Saving Easier – The white paper recommends reforms such as in the UK, where 8% of earnings will be automatically contributed to pension savings accounts for each individual beginning in 2019. This creates $2.5 billion in additional pension savings each year, according to the World Economic Forum.
  • Support Financial Literacy Efforts – Financial literacy education should be offered throughout people’s careers to raise awareness of the importance of saving. The paper cited a media campaign in Singapore for the launch of a national annuity plan that focused on making financial information more easily understood by the average person.
  • Communicate the Objective of Pensions and the Benefits Provided – This would inform people on the level of income they can expect from government and mandatory occupational systems, and whether they need to accumulate their own individual savings to supplement that income.
  • Aggregate and Standardize Pension Data – The paper cited Denmark as an example where an online dashboard collates pension information to provide individuals with a complete view of their different pension savings accounts.

“The retirement savings challenge is at crisis point and the time to act is now,” said Jacques Goulet, president of retirement, health, and benefits for consulting firm Mercer, which was the lead collaborator for the white paper. “There is no one silver bullet solution to solve the retirement gap. Individuals need to increase their personal savings and financial literacy, while the private sector and governments should provide programs to support them.”

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Home > News > Regulation > Treasury Rejects Benefits Cuts for Automotive Industries Pension Plan
Regulation

Treasury Rejects Benefits Cuts for Automotive Industries Pension Plan

Fund faulted for using assumptions that contradicted its own information.

By Michael Katz

The US treasury has rejected the Automotive Industries Pension Plan’s application for benefits reductions under the Multiemployer Pension Reform Act (MPRA).

The Treasury Department said that, after reviewing the application and consulting with the Pension Benefit Guaranty Corporation (PBGC) and the Secretary of Labor, the fund had used unreasonable assumptions in determining the proposed benefit suspensions.

Specifically, the Treasury concluded that the mortality rate assumption, the assumption regarding the rate at which married participants will elect a joint and survivor benefit, and the assumption regarding the probability of benefit commencement of terminated vested participants were not realistic under the standards in the MPRA regulations.

“Because the application uses projections that rely on assumptions that are not reasonable,” said the Treasury in its rejection letter to the fund, “it fails to demonstrate that the proposed suspension is reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency.”

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The Treasury also faulted the fund for using assumptions that contradicted its own data. For example, the fund based its cash flow projections on the assumption that terminated vested participants over age 70, who have not yet started taking benefits, will never do so. However, based on the information provided by the fund, the Treasury pointed out that terminated vested participants over age 70 do, in fact, begin taking benefits at varying rates at and beyond the age of 70. It also found that more than 200 terminated vested participants over the age of 70 were expected to begin taking benefits during the next five years.

The fund also assumed that 100% of married participants would elect a joint and survivor annuity available to them, without providing support for this assumption in its application. When asked by the Treasury Department to provide supporting data, the fund indicated that only 42% of married participants elected joint and survivor annuities during the five previous years. Additionally, the Treasury said the fund used an adjusted version of a standard base mortality table for determining current mortality rates, but did not provide support for the adjustment.

The Treasury also indicated the fund was using other questionable methods for its actuarial assumptions, but did not specify them as they were irrelevant to the application.

“As the MPRA case team has previously explained to you and your representatives,” said the Treasury, “the application includes a number of other actuarial assumptions and methods that have raised concerns, but that are not relied upon as a basis for Treasury’s decision to the deny the application. Treasury remains willing to discuss these issues with you further.”

In its original application, which was submitted in September 2016, the fund said it would become insolvent by 2030 without the suspensions. 

 

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