Pension

A pension provides regular income payments that you would receive for the rest of your life when you stop working--typically when people retire. A pension plan is a large pool of savings grows over time through contributions from workers or plan participants and their employer or plan sponsor. The plan assets are managed by professional investment managers, and most of the risks (such as investment risk) associated with managing plan assets will be assumed by the plan sponsor rather than plan participants. Particulars will vary from plan-to-plan. For example, there are variables such as how the money or contributions are set aside, who makes contributions, how the income is generated, when payments are made, the types of payments that are made, and how long pension payments last. The basic idea is that the longer you work the higher the payout. There may be tax breaks for pension contributions and there are limits on how much can go into a plan. Many pensions are payable to a surviving spouse on the death of the policyholder, and some pension payments are inflation-adjusted. The term pension is most often associated with defined benefit pension plans that provide regular, annuity-like payments to retirees. This is in contrast to defined contribution plans such as the 401k that shift most responsibilities onto employees and do not provide guaranteed lifetime income.

Prepare to Rely on Human Capital Rather than Financial Capital

In his most recent Investment Outlook letter, PIMCO founder Bill Gross suggests that investors need to prepare for difficult adjustments in a world of near zero real returns from financial capital.

Gross describes the dying cult of equity that has evolved over the past century, and advises readers to expect future equity returns that are much less than 6.6 percent average real return (the “Siegel constant”) since 1912.

Gross considers the 6.6 percent real return on stocks since 1912 to be an “historical freak, a mutation likely never to be seen again as far as we mortals are concerned.”

This view is based in part on...

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Why Financial De-Risking May Leave Consumers at a Loss

The term de-risk has been appearing frequently in recent financial news.

General Motors’ recent decision to offer lump-sum pension buy-outs to 42,000 retirees is an attempt to reduce the company’s pension obligations with the hope of returning GM to investment grade status in the eyes of rating agencies.

Commenting on the decision, GM’s CFO Dan Ammann mentions that the “actions represent a major step toward our objective of de-risking our pension plans and will further strengthen our balance sheet and give us more flexibility.”

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Mark Warshawsky on the Retirement Income Market

Mark J. Warshawsky is Director of Retirement Research at Towers Watson.

Dr. Warshawsky served as assistant secretary for economic policy at the U.S. Treasury Department from 2004-2006 and he has held senior level economic research positions at the Federal Reserve Board, the Internal Revenue Service and...

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British Insurers Advocate Comparison Shopping for Annuities

The Association of British Insurers announced that the organization will adopt a new code of conduct that could have a meaningful impact on annuity sales. The decision is in response to criticisms of annuity industry sales processes. Critics have argued that current industry practices are inconsistent and opaque, and that this confusing annuity shopping environment ends-up costing financial services consumers real money. A recent report published by a British pension group suggests that current...

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SOA Offers Consumer-Oriented Content for Retirement Decisions

The Society of Actuaries (SOA) just published a series of short whitepapers or “briefs” that focus on some of the major decisions that are encountered by retirees. This is a great resource for consumers who are seeking objective content produced by experts. The Society has clearly made efforts to create content that is accessible to a non professional audience. The briefs are clear, short and focus on consumer -relevant topics such as “when should I retire.” There are 11...

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