Benefits October 22, 2013

Retirement Expected to Occur in Phases

October 22, 2013 (PLANSPONSOR.com) – Workers expect their retirement will consist of several phases due to increasing longevity, according to a new survey from UBS.
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“UBS Investor Watch: 80 Is the New 60” found nine of 10 survey respondents expect retirement will be made up of at least three such phases, which UBS labeled as Transition, My Time and The Last Waltz. The length of the Transition phase is estimated by the survey at five to 10 years, taking place in a person’s 60s. The My Time and The Last Waltz phases are both estimated to be 10 to 15 years long and take place, respectively, in a person’s 70s and 80s.

With the Transition phase, most investors younger than age 65 do not expect to stop working completely once they hit 65, but they do picture working differently and redefining their priorities. Sixty percent plan to work in a similar career but reduce hours, switch careers/start their own businesses, or devote significant hours volunteering for philanthropic purposes. According to the survey, while the additional time spent working is partially out of necessity for some, for others it is a chance to rechannel their talents and energies into new challenges, or achieve a work/life balance where they still enjoy their work, but with more free time to pursue hobbies.

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In the My Time phase, respondents said they expect to focus on increased travel and leisure activities. This is their chance to do all the things they always wanted but didn’t have the time, to tick off any items on their ‘bucket lists’ or spend more time on their favorite hobbies. Financial needs during this phase are said to be similar to the Transition phase, but with an even greater emphasis on cash flow/income stream, since they have no more work income and their spending is likely to increase.

As for The Last Waltz phase, respondents said they expect to slow down, live a simpler life and spend time reflecting on their life and legacy. This period involves less travel, with family more likely to come visit rather than the other way around. This phase is sometimes brought on by an accident (e.g., bad fall) or health scare (e.g., stroke), which prompts the person to decide to slow down, ending the My Time phase.

According to the survey, the expected emphasis on health issues in this phase raises concerns with workers, who may underestimate how much they may have to deal with, and spend on, health issues. Health care and long-term care are expected to be the primary financial needs during this phase.

For this survey, 2,319 U.S. investors were queried between September 24 and 30. Investors surveyed have at least $250,000 in investable assets and half have at least $1 million in investable assets. A report is here.

Administration October 22, 2013

Pension Administrators Confident About Their Funds

October 22, 2013 (PLANSPONSOR.com) – Public pension plan administrators are more confident about the sustainability of their funds and readiness to address future retirement issues, according to a new study.
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In their “2013 NCPERS Public Retirement System Study,” the National Conference on Public Employee Retirement Systems (NCPERS) also found continuing financial strength for public funds, with continuing improvement in long-term investment returns.

Despite a still-sluggish economy and volatile markets, confidence continues to grow among public pension plan administrators about their ability to address future retirement trends and issues. Respondents provided an overall confidence rating of 7.8 on a 10-point scale, up slightly from 7.7 in 2012.

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Despite market declines in recent years, plans’ returns on long-term investments continue to rise. Returns on three-year investments were 10%, up from 4% in 2012; returns on 10-year investments were 7%, up from 5% in 2012, and returns on 20-year investments remained essentially steady, at 8% this year compared to 9% in 2012.

The overall average expense to administer public pension plans and to pay investment manager fees decreased from the 2012 level of 73.1 basis points to 57.3 basis points (100 basis points equals one percentage point).

Public pension plans continued to adopt systemic and operational reforms to ensure plan sustainability. This includes lowering the actuarial assumed rate of return, raising benefit age and service requirements, tightening retiree return to work rules, shortening amortization periods and lowering the number of employees receiving health care benefits.

    Overall, funds reported domestic equity exposure at 35%, down slightly from 36% in 2012. International equity exposure remained steady at 17%. Over the next two years, funds plan to reduce domestic equity slightly and increase allocations to international equity, domestic fixed income, private equity and hedge fund investments.

    The average funded level of all responding public pension plans was 70.5%. Among NCPERS member plans, the average funded level was 71.5%, which is lower than the 74.9% figure in 2012. The average funded level for non-NCPERS plans was 69%. The two most significant reasons for the decline were lowering the actuarial assumed rate of return and market volatility.

    “Our annual survey provides convincing evidence that the vast majority of public pension plans are financially sound, well-funded and sustainable for the long term,” said NCPERS Executive Director and Counsel Hank Kim. “It also demonstrates that defined benefit public pension plans are the least costly way to ensure retirement security for American workers.”

    Kim added that, “The data we collected shows public pension funds are continuing their strong recovery from the historic market downturn of 2008 to 2009. Public pensions are managing their assets efficiently and effectively, making plan design changes to ensure sustainability, continuing to implement sound operational controls and are expressing strong and growing confidence about their readiness to address the challenges ahead.”

    Partnering with Cobalt Community Research, NCPERS collected and analyzed data on funds’ fiscal conditions and steps they are taking to ensure fiscal and operational integrity. NCPERS surveyed 241 state and local government pension funds with more than 12.4 million active and retired members, and with assets exceeding $1.4 trillion. The majority (82%) were local pension funds, while 18% were state pension funds.

    The National Conference on Public Employee Retirement Systems is a trade association for public sector pension funds, representing more than 550 funds throughout the United States and Canada. Cobalt Community Research is a nonprofit research coalition that helps governments, schools and other nonprofit organizations measure, benchmark and manage their efforts through surveys, focus groups and facilitated meetings.

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