Monthly Archives: October 2010

Interest rates, pensions, and the global economy

The Peterson Insitutute for International Economics (PIIE) picks up on the big pension story: the effect of low interest rates on pension funded status. Here’s an excerpt from the PIIE article:

As can be seen, US AA-rated 10-year corporate bond yields have dropped by more than 1 percentage point during 2010 to just below 4 percent recently, while UK rates have dropped slightly less. This is very bad news for all defined benefit pension plan sponsors (especially in the United States) whether they are private corporations or US state and local governments.

At a time when the US and UK economies cry out for more private investment and government expenditure, such declines in corporate bond yields and the associated increase in liabilities look likely to neutralize any investment value increases in pension funds’ assets—and quite possibly add to a pension plan’s existing underfunding. Correspondingly, private businesses and state and local governments may be forced to divert more money in to their defined benefit pension funds rather than invest them in the economy.

Given the scale of underfunding in defined benefit plans in the United States, where corporate pension plans are funded at only 80 percent,3 and state and local governments are even more underfunded (see figure 2), the required additional pension contributions by state and local governments are likely to be substantial.

You can read the full article here.

Seven steps to effective retirement

Market Watch’s Robert Powell weighs in on the seven steps to effective retirement. Here is an excerpt:

There are seven keys to a lot of things in life. There are seven steps to heaven and seven types of intelligence and seven habits of effective leaders.Now we have seven steps to retirement planning courtesy of the Society of Actuaries, which just released a 64-page report with the not-so-consumer friendly title “Segmenting the Middle Market: Retirement Risks and Solutions Phase II Report.”

“Retirement financial planning requires a methodical approach that identifies and quantifies each important component that affects the asset accumulation, income management and product selection/investment decision processes,” according to the report, which was sponsored by the society’s committee on post-retirement needs and risk and written by Noel Abkemeier of Milliman.

Not surprisingly Abkemeier says this approach is especially important for middle income Americans who likely have less than $100,000 set aside for retirement.

Read all seven steps here.