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Research

New Workers Must Save 20% of Income to Match Baby Boomers’ Retirement

Report finds new workers face “hostile economic environment.”

By Michael Katz

A new report from UK-based International Longevity Centre says that young people new to the workforce in both the US and UK will have to save 20% of their annual salary each year to afford the same kind of retirement as current retirees.

“Low investment returns and interest rates, sluggish economic and wage growth, and the gradual decline of defined benefit schemes means those entering the workforce today will face a hostile economic environment in which to build their pension pots,” the report said.

The Global Savings Gap report, supported by insurance company Prudential, looks at the pension systems of 30 high-income countries and regions, and measures performance based on affordability, adequacy, and intergenerational fairness.

The report said that although pension auto-enrollment in the UK has led to more people saving toward a private pension, many people are still failing to save sufficiently. Also, many who are self-employed or in part-time work are neglected by such initiatives.

“The government must do more to extend pension coverage and ensure that contributions toward private schemes are sufficient,” said Dean Hochlaf , assistant economist at International Longevity Centre. “Especially among overlooked groups such as the self-employed and those on low incomes who have yet to benefit from initiatives designed to improve private savings.”

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According to the report, young workers in the US face more of a challenge than their peers in other developed countries because of less generous publicly provided pensioner benefits.

“This puts the onus on people to save privately in order to secure an adequate retirement income,” said the report.

The report also said that pensioner spending in the US is not expected to become any more generous over the coming decades.

“Current workers will have to save substantial amounts to secure the same level of retirement income adequacy as current retirees,” said the report. “Our modeling implies that people entering the workforce today will need to save in excess of 20% of earnings, or $6,575 a year.”

But based on the International Longevity Centre’s findings, a lot of workers won’t be able to reach these goals.

“While just over half of the working population are currently saving into a private pension (54%),” said the report, “that still leaves a sizeable proportion and number of people who are not saving into a pension and are therefore likely to face a significant retirement income shortfall.”

Although more than 50% of the working population in the US are members of a private pension plan, the proportion making active contributions to these plans across the entire US adult population is far lower, said the report.

There are also significant differences by income level and type of work. Only 23% of US adults are saving toward a private pension, and there is a large discrepancy in pension saving across the earnings distribution. Among those earning above $75,000 a year, 28% are saving toward a private pension, while only 3% of those earning less than $25,000 make private pension contributions.

While the situation in the UK differs somewhat from that in the US, young workers face similar challenges when it comes to saving for retirement.

The report said that while the UK has a relatively affordable state pension, it is also one of the least generous. Britons entering the workforce today will have to save an average of just more than 18% of their annual earnings to secure a merely adequate income during their retirement. And for them to experience the same level of retirement income as current retirees, the report estimates that they need to save as much as 20% of their earnings each year.

“Anticipated savings behavior through auto-enrollment will not be sufficient to close the intergenerational savings gap,” said the report. “Even after accounting for expected private savings, average earners entering the workforce face a savings gap of around 6.4% of average earnings.”

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Home > News > Newsmakers > International Paper to Make $1.25 Billion Pension Contribution
Newsmakers

International Paper to Make $1.25 Billion Pension Contribution

The move is part of a long-term de-risking program at the company.

By Michael Katz

International Paper said it will make a $1.25 billion voluntary contribution to its US tax-qualified defined benefit pension plan by Sept. 15, and is taking additional steps in the second half of 2017 to reduce risk related to the plan.

“We see this as a really important step … a series of steps since 2004 to mitigate what has become a real risk factor in our enterprise,” said Guillermo Gutierrez, International Paper’s vice president, investor relations, in a conference call with analysts. “We feel more confident that we’ve enabled the company to operate in a lower-risk mode while also addressing our balance sheet.”

The move continues a trend among companies to proactively boost funding to their pensions fund. According to Goldman Sachs Asset Management, 2016 was the strongest year for contributions to US corporate defined benefit plans since 2013, and it expects contributions to increase another 10% this year.

The company said it would issue debt to help raise the majority of the pension contribution. According to an SEC filing, the company priced $1.0 billion of 4.350% senior unsecured notes due 2048. The filing indicates that the company will use this issuance toward the pension boost.

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“As we pay down the pension gap, which was $3.4 billion at end of 2016, we are also taking meaningful and deliberate steps to de-risk our pension plan,” said International Paper CFO Glenn Landau during the analyst call.

Landau said there were multiple reasons for making such a sizeable contribution now. He said the company’s analysis shows that it was very likely it would have to make contributions totaling $1.25 billion over the next several years anyway, and contributing to the company’s pensions is considered debt reduction by the debt agencies. He also said that the expected $400 million in tax benefits from the contribution is now locked in prior to any potential reduction in corporate taxes. And he added that the move would reduce the company’s Pension Benefit Guaranty Corporation (PBGC) premiums by $35 million to $45 million a year.

Landau said that because the benefits of the contribution outweigh the cost of the debt, the company doesn’t expect to make any required contributions to its pension fund over the next five years.

The company said it is considering the possibility of seeking out an insurance company to take on the pensions assets and liabilities as another de-risking mechanism, although it currently has no plans to do so.

“It’s an option out there as we look at the plan and the constituents in the plan,” said Landau. “It’s something we see as a tool in our arsenal, and we’ll evaluate multiple de-risking options over the next couple of years.”

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