Understanding the Impact of the Low Interest Rate Environment on the Retirement System in the United States

Background and Purpose

Interest rates in the United States have been on a steady declining trajectory since 2007 and only recently, with the prospect of a strengthening economy, have turned upwards. This prolonged period of low interest rates has had a significant impact on retirement readiness, and potential continuing low interest rates may pose a risk for future retirement security for many Americans.

Low interest rates have broad economic impact and present challenges for the retirement planning community by impacting plan sponsors, insurance companies and individuals. Some implications include:

  1. Lower investment returns on Defined Benefit (DB) assets (depending on investment mix) and lower legally mandated actuarial valuation interest rates that result in an increase in the present value of future benefits and thereby a decrease in pension funding security.  This lowered funded status causes higher DB contribution requirements and higher Pension Benefit Guarantee Corporation premiums.
  2. Lower Defined Contribution (DC) plan returns result in smaller accumulations for participants and increase the need for higher saving contributions,
  3. Lower expectation of investment returns means that insurers must charge more for annuity products, and
  4. Lower returns on assets for retirees with savings in fixed investments means retirees are more likely to run out of money or must take on more risk in their investment portfolio.

With these considerations in mind, the SOA's Pension Section Research Committee (PSR) would like to develop a better understanding of the implications of a continuing low interest environment on the retirement security in the US.

Research Objective

The SOA's PSR is seeking researchers to:

  • Identify major studies that reach conclusions about how persistent low long term interest rates impact the financial retirement security of Americans.
  • Prepare a summary of each of the studies, together with information on methodology and assumptions.  Each study summary should be presented in a standard template for consistency and ease of review.
  • Collect the summaries in a report that would then guide readers as to why the conclusions of each of the studies differs as well as the underlying issues that drive the differences.  It is expected that five to seven of these studies will be used as the basis for a comparative analysis to guide the reader on these issues. 
  • Include in the report a discussion of the issues that are involved in thinking about retirement security and an Executive Summary that both captures the highlights of the report as well as addressing the perspective of plan sponsors.

Examples of issues to be considered as part of the analysis include:

  • How do low interest rates impact the DB arena? What are the key implications of continuing lower interest rates?
  • How do low interest rates impact DC savers and their ability to achieve their retirement goals?
  • How have insurers reacted and responded to the low interest rate environment? How has the Retirement Annuity market been impacted? What have been and what are the innovations developed or in progress to address future concerns about low interest rates?
  • What risks must investors consider or take to increase their returns to build up their retirement accumulations and retirement security?
  • What are the underlying drivers that produce differing views of the expectations for future interest rate levels in a retirement context?
  • Should a model be developed to help institutions and individuals to better understand the implications of prolonged lower interest rates on retirement security? What factors should be included in a model that would help identify the impact of low interest rates on retirement security and better inform stakeholders of the implications?

Proposal

To facilitate the evaluation of proposals, the following information should be submitted:

  1. Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
  2. An outline of the approach to be used (e.g. literature search, model, etc.), emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.
  3. A description of the expected deliverables and any supporting data, tools or other resources.
  4. Cost estimates for the research, including computer time, salaries, report preparation, material costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
  5. A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions.  The organizers are interested in completing this project in a timely manner.  Suggestions in the proposal for ensuring timely deliver, such as fee adjustments, are encouraged.
  6. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

Selection Process

The PSR will appoint a Project Oversight Group (POG) to oversee the project.  The PSR is responsible for the selection of the proposal to be funded.  Input from other knowledgeable individuals also may be sought, but the PSR will make the final decision. The SOA's Research Actuary will provide staff actuarial support.

Questions

Any questions regarding this RFP should be directed to Steven Siegel, SOA Research Actuary (phone: +1-847-706-3578; email:  ssiegel@soa.org).

Notification of Intent To Submit Proposal

If you intend to submit a proposal, please e-mail written notification by Jan. 15, 2018 to Barbara Scott .

Submission of Proposal

Please e-mail a copy of the proposal to Barbara Scott .

Proposals must be received no later than Jan. 31, 2018. It is anticipated that all proposers will be informed of the status of their proposal by the end of March 2018.

Note: Proposals are considered confidential and proprietary.

Conditions

The selection of a proposal is conditioned upon and not considered final until a Letter of Agreement is executed by both the Society of Actuaries and the researcher.

The Society of Actuaries reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available. The Society of Actuaries also reserves the right to redirect the project as is deemed advisable.

The Society of Actuaries plans to hold the copyright to the research and to publish the results with appropriate credit given to the researcher(s).

The Society of Actuaries may choose to seek public exposure or media attention for the research.  By submitting a proposal, you agree to cooperate with the Society of Actuaries in publicizing or promoting the research and responding to media requests.

The Society of Actuaries may also choose to market and promote the research to members, candidates and other interested parties.  You agree to perform promotional communication requested by the Society of Actuaries, which may include, but is not limited to, leading a webcast on the research, presenting the research at an SOA meeting, and/or writing an article on the research for an SOA newsletter.