Mamas, Don’t Let Your Babies Grow Up to Be Pension Fund Managers
Below is the February 16th Thoughts from the Frontline, republished in full.
We do not have to look to Greece to find massively underfunded obligations. Here in the US we can find hundreds of examples, willingly created by politicians and businessmen who proclaim they are working for the public good. We call them pension funds, but they’re just another form of unfunded debt. A sovereign bond is a promise to pay a certain amount of money over time. A defined-benefit pension fund is a promise to pay a certain amount of income over time. The value of either is determined by the ability of the government or the pension fund (or its sponsor) to pay.
I am in the Cayman Islands as I write this letter, to speak at an alternative investment conference attended by the management of some of the largest pension funds in the US and Europe, both public and private. Being here has motivated me to write this week’s letter on the problems that pension funds face. The pension fund managers I have talked with take their fiduciary obligations seriously, and they face some serious challenges.
I was on the stage with Nouriel Roubini (who makes me come off as the optimist), and we were talking about macroeconomic risks. I was asked what other sorts of risks people should be thinking about, and I cited a recent report about how pension fund obligations had dramatically increased because of a small change in mortality tables. There has been a very steady increase in life expectancy over the last almost 100 years. It is a fairly well-defined trend. The actuarial accountants whose responsibility it is to track these things updated the life expectancy tables for a 65-year-old male, who can now expect to live an additional 21.6 years, two years longer than in the old table. I pointed out that this trend toward longevity is very well established and is likely to accelerate as new technologies and medicines become available, which means that underfunded pension plans are even more underfunded than we think.
I pointed out that while living longer is a very high-quality personal problem to deal with, if your pension plan doesn’t live as long as you do, that could be an issue. Some pension plan managers approached me afterwards to talk about this issue, and it is apparent that others are confronting it head on. Matt Botein, global co-head and CIO, BlackRock Alternative Investors, later talked about how he helped pension funds to hedge their “mortality risk” (the odds that pensioners will live longer) by buying a large life insurance company. The value and profits of a life insurance company will rise if the people they have insured live longer. That is a very creative way to deal with the exposure that pension funds have to the obligations imposed by longer lifespans.
Mamas, Don’t Let Your Babies Grow Up to Be Pension Fund Managers
Today we briefly look at four very large problems facing pension funds. With a nod to Willie Nelson, I’m not sure I want my babies to grow up to be pension fund managers. It’s going to be a very challenging occupation, given all the headwinds they face. Not that the ones I know don’t seem relatively happy and well-adjusted, but they do face a Sisyphean task.
Expected Returns, Realistic Expectations
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Mamas, Don’t Let Your Babies Grow Up to Be Pension Fund Managers
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