Life Longevity: Challenge for Pension Funds
You have worked tirelessly all of your life since the early years. You probably have already seen your gross pay being slashed for social security contributions. You have even gone a little extra mile to add into your pension pool to make sure your late years are financially secure. How about a side savings and investments portfolio?
Most potential pensioners have crossed all Ts and are ready to embrace a long awaited late stage of their lives, i.e. retirement. You have earned it; you sure are going to enjoy it.
Question is, have you accumulated enough to sustain your lifestyle for the rest of the long years of your life? What if you have done your part; followed the formula as advised, then why should you still be worried?
The answer is simply that numerous pension funds, whether state-run or private, are subject to potentially run insolvent while beneficiaries are still depending on their funds during retirement.
Last year, my firm was hired to draw a model which would revamp a local municipality’s pension system up-to-date so that they can re-adjust the distributions according to the new life expectancy of pension beneficiaries. What we found is that the common problem most pension funds are having is that during the wealth accumulation stage, these funds are not earning enough inflation-adjusted returns to make up for the improved longevity of life of their beneficiaries.
We all know that people are living much longer than before due to advanced technology in medical treatments, healthier diet, better quality of life compared to past generations, etc.
According to the study conducted by Society of Actuaries in 2015 here in the US, a 55-year old man has a 76% chance of reaching age 90; while a woman of the same age has an 82% chance. So for a retiring married couple, the probability that at least one of them will reach age 90 is 96%. This means that you will most likely spend as many years in retirement as you spent during your working time given that today most of us start working later in life due to time spent in education, a few years of unemployment or part-time jobs before we actively start funding our retirements. And we are at risks of running out of money to live on.
Improved human life longevity is not just here in the United States. My home country, Rwanda, is a perfect example of improved quality of life which translated into a higher life expectancy. In 2000, average Rwandan life expectancy was age 47. In 2014, it rose to about age 63. It’s projected to be over 70 in 2030, according to a recent study.
We cannot stop the clock. But we can encourage our beneficiaries to start early, stash as much as they possibly could, invest early to take advantage of the power of interest compounding and adopt a less lavish lifestyle during their prime. Pension institutions need to actuarially update their models and calculate contributions and distributions ratios accordingly.
As for us investment fund managers, the fiduciary rule is the best approach. Fiduciary means to always act in the best interests of clients first. Look for the most savvy investments options before we allocate these funds. Do our due diligence. We need to diversify these portfolios, maximize returns while preserving our capital.
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