January 2013

A View from the SOA's Staff Fellow for Retirement

By Andrew Peterson

This is the time of the year when we typically reflect on events of the past year and evaluate how they may impact the future. As I reflect on significant developments in the retirement plan area, I see three major trends which I believe will continue to impact our business in 2013 and beyond. While I'm writing this based on my view of the U.S. retirement market, I don't think they are unique issues to the U.S. and so should be of interest to our readers in Canada and beyond.

  1. Pension (longevity) “de-risking” – The initial move last spring by Ford and then GM to offer lump sums and/or annuities to select former employees and retirees started a wave of such announcements during 2012. (See related article in this issue by Cindy Levering.) It seems this is a trend that will continue despite “conventional wisdom” that these transactions are too expensive in a low interest rate environment (see Evan Inglis' article on why plans are de-risking now) and calls from certain groups like the Pension Rights Center for a moratorium. While this is described as “de-risking” from a plan sponsor perspective, I encourage SOA members working in this area to focus on providing a holistic view to your clients about risk and who is carrying the risk after the transaction. Is the risk being mitigated or just transferred and are the parties now taking on the risk able to manage it? For some more thoughts on this subject, see a blog post I wrote back in May 2012, after the Ford announcement.

  2. Public pension plan pressures – With the ongoing economic challenges, there continue to be significant pressures on many public sector pension plans. Contributions are escalating to insupportable levels for some plans due to past underfunding and losses from the “great recession” that are still being recognized. The pace of design changes for many states and localities continues to be significant in an attempt to manage costs. In addition, the Government Accounting Standards Board (GASB) in the United States adopted significant changes in 2012 (see our November PSN article on this topic) which represent a significant shift in public sector pension accounting rules. Paradoxically, the change in accounting standards is receiving unsatisfactory reviews both from those satisfied with the prior paradigm (for the new de-linking of accounting cost and the annual required contribution) and from those advocating for market-based reporting (for continuing to allow most systems to use long-term rates of return as their discount rate). In the context of improving actuarial funding, the SOA hosted a Public Plan Funding Symposium in September 2012 which brought together experts to discuss this topic. A conference report is anticipated in early 2013, but in the meantime, conference presentations are available at the link provided.

  3. Lifetime Income – With the continued trend to defined contribution (DC) plans and the baby boom generation now retiring, it seems like the retirement income industry and policy makers have finally awakened to the fact that individuals cannot easily manage the “pot of money” that they have accumulated to provide lifetime income in retirement. Lifetime income and the “annuity puzzle” (why more people don't select an annuity when given the option) are hot topics right now for academic papers and industry meetings. The retirement income industry is developing different products that manage retirement income from DC plans in various ways—from in-plan solutions to various types of rollover options. Finding new ways to efficiently convert account balances into lifetime income streams is an important contribution that actuaries can make to the area of retirement security. The SOA has several ongoing projects in this area which will be completed in 2013 and should be helpful for our members and plan sponsors.

I'm sure there are other significant events from 2012 that others might identify, but I believe these are three that will continue to impact the work of pension actuaries in 2013 and beyond. Finally, as I close this column, I would like to highlight a just released SOA retirement research report, Observations on Input and Output Smoothing Methods: How do they affect the funding of defined benefit plans? It is focused the general similarities and differences between input and output smoothing methods in the private sector pension arena—a topic that received significant attention during deliberations over the U.S. MAP-21 Pension Funding Stabilization provisions and will likely receive attention again. The report seeks to inform policymakers of the basic attributes of each type of method—absent specific policy proposals—so that they can better determine whether one type of method better suits their objectives and, if so, which type. We believe actuaries have a unique and essential perspective on the issue of smoothing, and should help other stakeholders—legislators and sponsors – understand the options before them. I encourage you to read the report and provide any feedback or comments to either Joe Silvestri (jsilvestri@soa.org), the lead researcher, or me.

Andrew Peterson, FSA, EA, MAAA is Staff Fellow – Retirement Systems at the Society of Actuaries headquarters in Schaumburg, Illinois. He can be reached at apeterson@soa.org.