Pension Plan presentation. David Broun 25 September 2014

Transcription

1 Pension Plan presentation David Broun 25 September 2014

2 Current state of DC plan Average fund balance (EXcluding voluntary contributions) for Academic Plan members as of June Age Class Number of members a Average balance Average fund balance (INcluding voluntary contributions) for Academic Plan members as of April Number of members Average balance 10 th percentile 90 th percentile a 2012 count includes members who have retired from SFU but have not withdrawn their funds from the Plan; 2014 count is only active members. b 2012 excludes voluntary contributions; 2014 includes voluntary contributions. The 2013 Academic Pension report indicates that voluntary contributions formed less than 3% of plan balances.

3 Average fund balance (EXcluding voluntary contributions) for Academic Plan members as of June Age Class Number of members a Average balance What this buys Average fund balance (INcluding voluntary contributions) for Academic Plan members as of April Number of members Average balance 10 th percentile 90 th percentile a 2012 count includes members who have retired from SFU but have not withdrawn their funds from the Plan; 2014 count is only active members. b 2012 excludes voluntary contributions; 2014 includes voluntary contributions. The 2013 Academic Pension report indicates that voluntary contributions formed less than 3% of plan balances.

4 Average fund balance (EXcluding voluntary contributions) for Academic Plan members as of June Age Class Number of members a Average balance What this buys Average fund balance (INcluding voluntary contributions) for Academic Plan members as of April Number of members Average balance 10 th percentile 90 th percentile a 2012 count includes members who have retired from SFU but have not withdrawn their funds from the Plan; 2014 count is only active members. b 2012 excludes voluntary contributions; 2014 includes voluntary contributions. The 2013 Academic Pension report indicates that voluntary contributions formed less than 3% of plan balances. 1. Apply your MPA balance to the purchase of an annuity. Following are some examples of current annuity quotes, assuming you have a balance of $750,000 in your MPA and you and your spouse are both 65 years old. All of the pensions are monthly amounts, and are increased annually at 2%. Life only, no guarantee $3, per year* Life only, 10-year guarantee $3, per year* Joint & last survivor, reduced to 60% on member s death $2, per year* Joint & last survivor, no reduction on member s death $2, per year* *Annuity quotes provided by Sun Life Financial. month

5 Volatility Contributions: 5% of salary for 40 years, 60% equities/40% gov. bonds (source: The Economist)

6 A nice problem to have Longevity risk Source: Annuity 2000 mortality tables transactions, Society of Actuaries, reports.

7 DC pension plans In a DC pension scheme all risk/reward is transferred from the employer to the individual employee.! In retirement, the employee must either purchase an annuity on the open market, or continue to manage their own investments.

8 DC pension plans In a DC pension scheme all risk/reward is transferred from the employer to the individual employee.! In retirement, the employee must either purchase an annuity on the open market, or continue to manage their own investments. How good a fund manager are you?

9 DC pension plans In a DC pension scheme all risk/reward is transferred from the employer to the individual employee.! In retirement, the employee must either purchase an annuity on the open market, or continue to manage their own investments. How good a fund manager are you? How closely do your professional fund manager s interests align with yours?

10 Welcome to Lake Wobegon, where all the children are above average.

11 What can be done? Investment gains can be maximized by: reducing management fees resolving the principal agent dilemma! Volatility can be reduced by: matching investment & pension time frames pooling funds and investing in uncorrelated assets Longevity risk is minimized by risk pooling, ideally without introducing new risks such as solvency of the annuity issuer.

12 Potential benefits of DB pensions & College Pension Plan People can actually afford to retire Retirement income can be projected ahead of time Annuity rates provide a reasonable continuation of living standards in retirement Low management and administration expenses Principal agent dilemma is largely absent Tax effective Pension obligations fully funded up-front Asset pool is segregated from both employer and government Don t have to be an investment expert