Defined benefit fund plan executives need to wake up and realize that liability management is as important, if not more, than managing assets, said pension fund executives at Pensions & Investments' Investment Innovation and the Global Future of Retirement conference.
“We have to start to realize that we are managing both assets and liabilities,” said Jim Leech, retired president and CEO of the C$140.8 billion (US$131.2 billion) Ontario Teachers' Pension Plan, Toronto. “We have to get realistic — when I see (pension funds), particularly in the U.S., using discount rates that are 7.75%, 8.5%, that is ridiculous. That is not going to happen — those days are gone.” Mr. Leech recommended that plan executives turn testing toward stochastic analysis and probabilities.
Sadayuki Horie, senior researcher at the Nomura Research Institute in Tokyo, and deputy chairman of the investment committee at the US$1.3 trillion Government Pension Investment Fund, Tokyo, said the Japanese pension fund had already woken up to these realities. “We have to try to change our pension fund in many ways,” Mr. Horie told conference attendees. He said the deflationary environment in Japan, and economic changes by Japanese Prime Minister Shinzo Abe, mean the pension fund has to change its portfolio management. “That is why the Japanese government set up an advisory board.”
Panel members also discussed recent changes to the U.K. pension market. In March, Chancellor of the Exchequer George Osborne said individuals would no longer be required to purchase an annuity to fund retirement, and could take a lump sum of their defined contribution savings, starting April 2015.
“I think it is a dumb idea,” Mr. Leech said. “I second that,” said Kathleen Kennedy Townsend, founder of the Center for Retirement Initiatives at the McCourt School of Public Policy at Georgetown University, and former lieutenant governor of Maryland.
“I agree completely — it is not a great idea,” said Pablo Antolin-Nicolas, principal economist and head of the private pension unit in the financial affairs division at the Organization for Economic Co-Operation and Development, and also chairman of the round-table session.