RetireSecure Blog

April 8, 2016

Allianz Asset Management Joins Wharton’s Pension Research Council as Associate Level Member

Filed under: PRC Partners — The Pension Research Council @ 4:29 pm

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that Allianz Asset Management AG | Project M has joined the Council for 2016. Read the full press release here.

Advertisements

March 15, 2016

Prudential Joins Wharton’s Pension Research Council as Director Level Member

Filed under: PRC Partners — The Pension Research Council @ 3:58 pm

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that Prudential has joined the Council for 2016. Read the full press release here.

July 10, 2015

The Vanguard Group Joins Wharton’s Pension Research Council as Director Level Member

Filed under: PRC Partners — The Pension Research Council @ 10:00 am

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that The Vanguard Group has joined the Council for 2015. Read the full press release here.

May 19, 2015

Capping Pension Costs? Cautionary Lessons from the UK

Filed under: Financial Literacy,PRC Partners,Retirement Research — The Pension Research Council @ 8:03 am

by Mike Orszag, TowersWatson

Economists typically criticize price regulation because, for most products, competition is seen as sufficient to drive pricing to reasonable economic levels. Moreover, consumers are usually better off as a result of the competitive process. Exceptions would include cases where significant economies of scale exist, as in the case of utilities, and also where imperfect information impedes the orderly operation of markets.

Many would argue that pension plans and related long-term savings products fit into the latter category: that is, the complex and abstract nature of long-term saving can make it difficult for market pressures to drive down product fees and charges. International experience suggests that these markets do not function particularly well when there is no regulation at all.

Countries have taken various different approaches to deal with such market failures, including:

  • Product regulation making the underlying product simpler and more comparable;
  • Cost regulation capping product costs;
  • Intermediary regulation regulating the sales process so it works more smoothly.

Interestingly, the UK has experimented with all three approaches over time, and hence its experience offers insights into concerns likely to arise for other countries. After the introduction of personal pensions in 1988, the UK heavily regulated intermediaries via a “polarization” regime for retail financial services. The term “polarization” was used because financial advisers either had to represent a single investment company, or remain independent and represent all companies on the market. During the early years of the UK personal pension model, administrative costs proved to be very high, and surrender values sometimes eroded years of contributions. By the mid-1990s, it had become clear that the regime did not work at all well, perhaps because the regulation was inadequate, or the approach on its own may have been insufficient to prevent product complexity and high costs. In particular, the regime did not eliminate the payment of commissions to intermediaries, possibly misaligning incentives. And in addition while various disclosure regimes were tried, all had serious deficiencies.

Next, the UK adopted stakeholder pensions in 2001, with prescribed charges, minimum contribution levels, and flexibility on timing of contributions. The regulatory regime accompanying this new pension model included a mix of product and cost regulation. Annual administrative charges were capped at 1% of assets. The government’s effort to cap charges did succeed in driving down overall pension management costs, and the regulatory change forced an industry-wide wave of cost reduction and modernization. Nevertheless, the reduction in surrender charges produced unexpected consequences, because surrender charges had subsidized fund distribution; accordingly, lowering these provided less incentive for companies to seek consumers. As a result, the regulatory and capital burden imposed under the new regime reduced the number of firms in the industry and hence narrowed options for consumers.

Even today, 15 years after the launch of stakeholder pensions in 2001, the move to impose charge caps on pensions remains incomplete. For instance, earlier this year, the government proposed a 75-basis point cap on the default investment funds used by participants who were automatically enrolled into pension savings products. This may sound straightforward in theory, but it has not been simple to implement in practice.

One problem is that existing plan participants who were previously defaulted into funds with charges over the new cap must be informed of the cap changes, and such communication can be costly, complex, and often difficult for many members to understand. Further complicating matters are implementing new rules, effective next year, to protect members by disallowing any commission payments that are indirectly paid by members.

Moreover, plan sponsors still have many unanswered questions about the charge caps. Practically speaking, pension charges are allocated variously into asset-based, contribution-based, and annual fees, making cross-plan comparisons difficult. Additionally, new measures will be required to ensure that non-contributing members are not forced to subsidize those who do contribute. Another practical consideration is how to obtain plan compliance certification, and how to clarify what to do when a pension plan inadvertently exceeds a cost cap.

The UK experience with capping pension fund changes suggests that such caps can drive down retirement plan costs. Yet the process is complex, and the regulatory burden may be unexpectedly heavy on providers as well as participants. In other words, charge caps have long-term consequences for the structure and nature of pension saving.

Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania

March 23, 2015

The Lump of Labor: Is it Still a Fallacy?

Filed under: Planning for Retirement,PRC Partners — The Pension Research Council @ 10:14 am

by Mike Orszag, TowersWatson

Some of the key questions people must ask themselves when planning for retirement include how long they can continue to work, how much they can earn, and whether they can count on their job still being around. In this day and age, these worries are compounded by a concern that older individuals could be ‘forced out’ by the younger generation. That is, even if someone is not ready to retire, he or she might feel pressured to leave “to give the young folks a chance.”

This perspective arises from a belief that there are only so many jobs than can be filled in the economy – the so-called “Lump of Labor” view. In fact few arguments irritate mainstream economists more, as history has shown that there’s not a fixed demand for a set lump of labor. Instead, over our history, when labor supply has changed, wages adjusted and the economy grew.

A related argument is that people’s skills become obsolete over time, so technological change dooms us to ever-higher un- and under-employment. Certainly technological change has forced re-invention of the workplace time and again, so it’s critical to invest in one’s knowledge to avoid job loss. But the productivity improvements flowing from new technology do not lead to aggregate job loss; rather they produce job evolution. Of course the adjustments can take a long time and may be painful for some, but a more productive economy will float many boats.

Nevertheless, there’s good reason to worry that the lump of labor ‘fallacy’ may now be more right than wrong, due to the changing nature of skill revolution. In the old days, there were always some jobs that unskilled workers could take, but this may not be true in the future. For instance, during the industrial revolution, machines took the place of many simple and repetitive tasks. Yet there were plenty of other jobs where people were more productive than machines. Additionally, new jobs appeared that had not been anticipated previously, as a result of the new technologies.

What seems different today is that machines are now growing smarter than people. What this implies is that the range of alternative jobs which people can do better will shrink. This could make labor market adjustment more painful and longer for the individuals involved.

The reality that our human capital is increasingly risky is rarely acknowledged by financial advisers and pension sponsors. Yet most people are unable to accurately estimate how likely it is that their own skills will be relevant a decade or two hence. Nevertheless, the nature of technological change should make human capital risk more important for those looking ahead and planning for retirement. Not only is obsolescence a bigger risk, but mitigation steps are far less clear.

Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania

March 11, 2015

International Foundation of Employee Benefit Plans Joins Wharton’s Pension Research Council

Filed under: PRC Partners — The Pension Research Council @ 1:22 pm

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that the International Foundation of Employee Benefit Plans has rejoined the Council for 2015. Read the full press release here.

February 26, 2015

Mutual of America Joins the Pension Research Council

Filed under: PRC Partners — The Pension Research Council @ 10:52 am

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that Mutual of America has rejoined the Council for 2015. Read the full press release here.

January 27, 2015

MetLife Inc. Joins Wharton’s Pension Research Council

Filed under: PRC Partners — The Pension Research Council @ 4:57 pm

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that MetLife, Inc. has rejoined the Council for 2015. Read the full press release here.

January 22, 2015

Lump Sums Could Mean Longer Worklives

Filed under: New Research,Planning for Retirement,PRC Partners — The Pension Research Council @ 4:14 pm

Eligible individuals can start receiving Social Security benefits as young as 62 but if they waited until age 70, monthly benefits would rise 76%.  Yet most Americans retire before the age of 65.

In their new paper “Will They Take the Money and Work? An Empirical Analysis of People’s Willingness to Delay Claiming Social Security Benefits for a Lump Sum” Raimond Maurer, Ralph Rogalla, Tatjana Schimetschek, and Olivia S. Mitchell, Wharton Professor of Insurance/Risk Management & Applied Economics/Policy, and Director of the Pension Research Council, found that people would claim Social Security benefits later by about half a year if they could get a lump sum equal in actuarial value to their future benefit increases. This would rise to two-thirds of a year if they could only get a lump sum after age 67, their Full Retirement Age. Moreover, those who currently claim at the youngest age would also delay the most.

One pundit predicted that the US could expect an increase in GDP due to increased labor force participation as a result of lump sum incentives.

To read more about this story click here.

September 17, 2014

Calpers Drops Hedge Funds

Filed under: Planning for Retirement,PRC in the News,PRC Partners — The Pension Research Council @ 2:18 pm

The California Public Employee’s Retirement System or Calpers plans to shed nearly $4 billion dollars of hedge fund investments. “Calpers has always been a leader in the public pension space,” says Olivia Mitchell, Wharton Professor of Insurance/Risk Management and Applied Economics/Policy and Director of the Pension Research Council. “Certainly others will take a good look at their hedge fund portfolios.”

Read the full article here at Marketplace.org

Next Page »

Create a free website or blog at WordPress.com.

%d bloggers like this: