Tag Archives: Pensions

Knowing participants’ profiles is becoming increasingly important

The debate about a new pension system in the Netherlands is becoming more and more complicated because of issues including solidarity, labor market flexibility, indexation security and uncertainty about the level of pension income. These subjects are complicated. The question regarding whether pension income from retirement date is high enough in relation to income received in active employment or more relevant to the spending pattern is not often mentioned in this context. The questions about how long pension is to be paid out (life-long) and how much premium participants are willing to pay for their retirement is rarely discussed.

We suspect that one of the reasons that we find these questions so difficult to answer is because we do not really know about the (ex) participants (workers, retirees and former participants with vested pensions). As a consequence, the pension debate becomes an abstract compensation and benefits discussion focused on a complicated financing component.

Having relevant knowledge about our stakeholders could provide significant benefits. If we know and understand our participants well, then

• Pensions – even without specific customization – could be fitted to stakeholders more appropriately.
• Choosing the most appropriate financing (in terms of risk, duration and reservation) could be ensured.

Getting knowledge and information about our pension stakeholders can be accomplished in various ways. This may include:

• The pension stakeholders ask the right questions at the right level of knowledge-estimated by using available data (such as salary level and job title)-and in understandable language
• Combining knowledge of our pension stakeholders with external data to gain more insight and to better understand their needs.

A good example is the correlation between education level and life expectancy of participants. The Dutch Central Bureau of Statistics (CBS) regularly publishes that the life expectancy of a Dutch man with a highly qualified education at the academic level is much higher than that of a man who has enjoyed a maximum of elementary school education. Milliman calculated that the remaining life expectancy at the age of 68 for the more highly educated group was more than two years greater than for the other group.

In practice, it appears that data about the training of individual participants is often not available to pension funds. If this information were adequately collected and stored in the near future, then additional analyses could be performed using this data. This contributes to the necessary knowledge and insight into the needs of our pension stakeholders. As a result, not only the expected duration of benefits can be determined, but also by combining this data with other available data, we could estimate the individual’s income needs. The combination of data and analysis of connections between data can create even greater insight. For example, it makes a big difference whether a participant in a retirement scheme has a physically demanding occupation or a light one, whether he travels regularly or stays at home reading, and whether he maintains a healthy lifestyle or just the opposite.

Collecting knowledge about our participants and analyzing already available knowledge or information (big data) could ensure that we design better pension schemes and that their funding takes place in the most appropriate way.

Let’s start with that today. More knowledge and insight into participant profiles helps both the employer and the performer get better “demonstrable in control” information regarding their pension commitments, provisions, and HRM policies.

Asset-liability management improves Italian pension funds’ investment strategy

In Italy, some pensions are obligated to offer a capital guaranteed subfund to plan participants. While many participants see guaranteed subfunds as safe options, the investment may not meet their long-term retirement objectives. In this article, Milliman’s Dominic Clark highlights asset-liability management (ALM) analyses that were conducted for a large institutional Italian pension fund. The client’s main aims were twofold:

• To better understand the fit between asset allocation and expected future liabilities given the constraint of having to respect the capital guarantee of the guaranteed subfund.
• To better inform participants regarding the likely evolution of their account balances, and in particular, provide fund-specific projections that can help guide members in their choice of future contribution levels.

2016 survey of Indonesian employee benefit obligations

In this report, actuaries Halim Gunawan and Herry Kuswara analyze the employee benefit obligations of Indonesian companies. The authors focus on post-employment, termination, and other long-term employee benefits. The report aims to educate and create awareness about the state of employer-sponsored long-term employee benefit programs in Indonesia.

Generation X: Savings, pensions, and Social Security

pink-lesleyThis is the second blog in a three-part series exploring the economic history and future of Generation X. The series also focuses on what this generation can do to prepare for retirement. In the first installment, we highlighted some of Generation X’s financial predicaments.

Generation X faces major retirement challenges.

Besides the issues of job security and stagnant wages, there is the topic of cold hard cash—saving enough, having enough, allocating enough.

Some Gen Xers know that they started saving too late and wouldn’t be able to make up the difference. Others were worried because they’d been saving since they got their first jobs—20+ years ago—and felt that that money still wouldn’t be enough when they reach retirement age. And others just couldn’t save. As one fellow Gen Xer put it, “My wife and I don’t make enough together to save for retirement and the kids.” And let’s not fool ourselves—“retirement age” no longer has a firm definition.

We Gen Xers aren’t alone. According to the 2015 Retirement Confidence Survey published by the Employee Benefit Research Institute, “Almost two-thirds of workers (64 percent) say they feel they are behind schedule when it comes to planning and saving for retirement.” This survey also notes that cost of living and day-to-day expenses top the list of reasons why workers don’t save (or don’t save enough) for retirement.

Pensions, often referred to as defined benefit (DB) plans, used to be a mainstay. But they are not as common as they once were, and this, too, is affecting Generation X. In fact, according to Jennifer Leigh Parker on CNBC.com, Generation X is the first generation to see its pension leg replaced by 401(k) savings plans, which were increasingly adopted during the 1980s. The 401(k) plans are portable but aren’t designed as a monthly “pension paycheck.” The owner of the account balance has to take significant action to understand and convert any or all of it to that pension paycheck. Gen Xers , in general, will find that its collective savings plan account balances are woefully deficient and for many, sitting in a tax-deferred account. And the Internal Revenue Service (IRS) can’t wait for us to start cashing them out.

Additionally, we Gen Xers, who have been paying Social Security payroll tax for years, may not receive full benefits upon reaching retirement age.

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Lump-sum windows: Too much information?

Benbow-DavidIn January, the U.S. Government Accountability Office (GAO) issued the report “Participants need better information when offered lump sums that replace their lifetime benefits.” This is much easier said than done. There is so much information included in lump-sum kits that they typically run at least 25 pages. The Special Tax Notice alone takes up five pages.

The relative value rules are supposed to give participants a heads-up if they’re about to forfeit an early retirement subsidy, but very few participants ask questions about the relative value descriptions in their pension kits. Could the reason be that the relative values clarify things so much that everyone understands all the consequences of their elections? Could it be that participants are already suffering from information overload and simply tune out?

“Better information” is only better if participants understand it and are willing to take the time to read it. Unless each lump-sum kit is hand-delivered by a pension specialist and an actuary, participants will never understand the required information.

There is still a great deal of interest in offering lump-sum windows. Many plan sponsors have been offering lump sums to terminated vested participants, and in 2012, both Ford and General Motors got approval to offer their retirees the opportunity to trade in their lifetime payments for lump sums.

The Internal Revenue Service (IRS) has, for the time being, stopped issuing Private Letter Rulings allowing companies to offer lump sums to retirees. But why? Are they afraid retirees will be bilked out of their future payments? Retirees wouldn’t be losing out on any early retirement subsidies like terminated vested participants might. Furthermore, there are several reasons why it might be very advantageous for retirees to take lump sums:

  • If they don’t expect to live very long

Remember that retirees are old. If you knew your days were numbered and you were receiving monthly payments for life, wouldn’t you jump at the opportunity to trade your $200 monthly payment for an $18,000 lump sum?

  • If their monthly annuity payments are ridiculously small

Many plans only pay lump sums if the total present value is under $5,000 at the time of commencement. As a result, there are a lot of retirees out there who are receiving monthly payments of less than $50. They would probably appreciate the opportunity to turn that small payment into a chunk of money they could actually do something with.

  • If their financial situations have changed

People’s situations change over the course of time. Retirees may decide that, for whatever reason, the lump-sum payment could give them the opportunity to pay off a debt, buy an RV, or invest in a business.

Instead of saying that participants need better information, why not accept that every participant’s situation is different and no amount of additional information is going to change the fact that they know what they want?

Risk sharing within pension plans in the Netherlands

Sagoenie-RajishDutch pension system
Like many other European countries, the Netherlands operates a three-pillar pension system. This consists of:

1. A government-provided pension.
2. An employer-provided pension.
3. Personal pensions purchased through individual savings.

The first pillar, government pension, provides a basic income to retired people in the Netherlands. It is financed through taxes and is based on a pay-as-you-go system. The pension provided is linked to the country’s minimum wage. An amount of 2% of the state pension benefit is accrued for each year that an individual has lived or worked in the country until the age of 67, with a maximum period of 50 years taken into account. Depending on the increase in nationwide longevity, the age of 67 will increase.

The second pillar consists of occupational pension schemes. Companies offering their employees a pension plan are obliged to administer these plans externally via a pension fund or an insurance company. Funding for these schemes is provided through employer and member contributions and is based on capitalization. A majority of employers used to bear all the risk for these schemes but, in line with globally changing attitudes, there has been a move toward risk-sharing types of schemes. This pillar is discussed in further detail below.

The third pillar consists of annuities and pensions bought from individual savings. It is the main source of postretirement income for self-employed individuals and individuals working for organizations that do not provide a pension. To encourage people to make use of this pillar, tax incentives (within limits) are provided by the government.

In 2014 and 2015 the tax incentives in the second and third pillars were further limited. The annual salary on which the pension is based is limited to EUR 100,000.

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