Designing 21st Century Pension Plans: We're Making Progress!
“There is an urgent need to find a better balance between the individual orientation of a DC Plan and a collective approach where there is some sharing of risks….”.
Melbourne Mercer Global Pension Index, 2013
Pension Design in the 21st Century
Our January Letter explored the possible meanings of ‘Defined Ambition’/’Target Benefit’ Pension Plans. Two underlying messages were that regardless of the name we attach to a pension design, two features always deserve special attention: 1. How the plan uses the investment return on retirement savings to achieve pension adequacy and affordability, and 2. How the plan provides post-retirement income for life.
To make these messages tangible and clear, we introduced readers to Janet or John who earned $60K/yr over a 40-year career, and who need $40K/yr to maintain their standard of living over their expected 20-year post-work lives. If half of this $40K/yr comes from a universal Pillar 1 pension, then ideally, the other half comes from an effective, efficient employment-based Pillar 2 pension arrangement. So specifically, two important questions regarding the Pillar 2 arrangement become: 1. How much do John or Janet (and/or their employer) have to contribute over 40 years to fund the expected 20 post-retirement payments of $20K/yr from that plan? and 2. What can be done to prevent Janet or John outliving their money?