Showing posts with label pension. Show all posts
Showing posts with label pension. Show all posts

Jul 8, 2012

How to Stretch 'One Point Estimates'

So called 'One Point Estimates' (OPEs) fill up our lives, but are useless without context. What can we do?

Some common real live OPE examples: 'Speed Limit 100', 'Temperature 70° ', 'Post Stamp 33', etc....

To give 'estimates' meaning, we have to put them in context:
  • To define a post stamp value, just a simple number on a post mark isn't enough. We need more information, like currency, country, date, uniqueness and 'stamped' or 'not-stamped' information to determine a more precise value of a certain stamp.
  • A speed limit of 100 has only meaning if you know if it's measured in Mph or Km/h.
  • If you measure the temperature it's important to know whether you measure in ℃ or in ℉.

Stretching Technique
From now on if you're confronted with a 'One Point Estimate' in life, ask yourself the next question:

How can I stretch a one dimensional One Point Estimate
into a two dimensional graphic in more than one way?

The way to stretch a point, is to stretch your mind.
Let's tak a look at a simple example.

Application:Pension Funded  Ratio

Level 1: Your pension fund reports a 90% Funded Ratio

Just reporting a 90% Funded Ratio (FR) is in fact no-information. It's what I call a 'One Point Estimate' (OPE) that hardly adds any relevant information to you as a pension fund member.

At the best, it only raises questions.

More likely, this information leads to misunderstanding, confusion or even panic.

Level 2: The Funded ratio reported on a time scale

Reporting values on a 'time scale' is often the first attempt to stretch information in order to enable pension fund members to gain insight into the (future) development and direction of the funded ratio.

This kind of reporting gives pension fund members an idea about the short term variance and direction of the funded ratio, but still lacks information about 'how' and 'why'.

Level 3: Reporting values as function of their dependent variable(s)

On this level the added value of stretching an OPE becomes really visible.
Key question you have to ask yourself is:  what are the main variables that influence the outcome (funded ratio) most?
As the expected future return and/or discount rate is one of the most relevant variables, it's illustrative and clarifying to express the funded ratio as a function of for instance the discount rate.

By doing so, every pension fund member can conclude that (in this case) the pension fund needs a future return of at least 4% p.a. to meet its obligations and that the 'solution area' (triangle 'A'), gives visible information about the 'space' or room for future indexation or pension-improvement at higher return rates.

Level 4: Adding additional information 1:Future Longevity Effect

Our two-dimensional diagram is now enriched with additional information of other vital variables that influence the pension funded ratio outcome.
We start with the estimated effect of future longevity development.

As pension fund members can note, the solution triangle area 'A' is now substantially reduced and a minimal return of (in this case) 5% is needed to fund pensions in a sustainable way.

Level 5: Adding additional information 2: Confidence level (CL)

Next, several confidence levels, based upon (future) regulatory demands, are plotted in the diagram.
For example, we may plot:
  •  the 97.5% confidence level (CL) as current risk appetite of a specific pension fund (is it enough?)
  • the 99.5% CL European insurers have to meet in Solvency II demands. As Solvency demands will probably also apply for pension funds in the near future, this level becomes relevant in a proactive approach.
  • The 99.5% CL that's applicable in Basel III demands for Banks.

In this case it becomes visible and clear to every pension fund member (and probably also every pension fund board member!), that 'more secure confidence levels', as well as 'future upcoming regulatory confidence levels' demand unrealistic high returns of this pension fund under study. As the confidence level increases, the solution area 'A' stepwise shrinks to zero.

In this specific case the pension fund has no other choice than to lower its future pension rights or to accept a higher risk of not meeting its pension obligations.   

Key Question
Key question for YOU: Have you done the above exercise with your pension fund?

Pleas answer this question Honestly...
If the answer is NO, just keep on hoping things will turn out for the best......

By the way, you don't need to be an actuary to ask your pension board to inform you by means of the above formulated simple diagrams. I hope you get clear answers...

What's the difference between 'Pension Board' and 'Pension Bored'?

Practice Check: NYSCRF
Let's reflect  the above approach on the third-largest public pension fund in the United States, the New York State Common Retirement Fund (NYSCRF)

First, just watch the next video in which New York State Comptroller Thomas P. DiNapoli tries to explain that based on the fact that NYSCRF has 'worked' for more than 90 years, it will continue to work for many years to come. 

Although Thomas DiNapoli probably does his utmost best and tries to reassure us that  NYSCRF is fully  under control, communication and taken measures unfortunately do not underline this standpoint:

NYSCRF Communication Fact Findings
  • Annual reports and additional communication mainly report about the asset side of the balance sheet and not about the liability side
  • No Mission Statement or Strategic plan can be found on either the NYSCRF-website or in the annual report (how to steer without a general target?)
  • No risk appetite is communicated and no confidence levels are publicized, communicated or mentioned in the annual reports.
  • Merely a level-2 kind of information about the 'Funded Ratio' is given in the NYSCRF annual 2011 report, without any consequences.

    Although the Funded Ratio is rapidly declining, the annual report does not transparently explains 'why' and 'what can be done about it'.
  • No mentioning of the possible effects of available PEW information that the Governmental Accounting Standards Board (GASB) is considering new rules that would decrease the funded ration substantially

Redefine Pension Fund Governance
It's clear that not only communication about state pensions needs to be improved (complete, balanced and structured), but also 'pension governance' has to be redefined to  a more general and strategic level where a vision, mission statement and a strategic plan are defined and where responsibilities and power of the comptroller are set  'in line' with these documents.

Until now, Comptroller Thomas DiNapoli 'is responsible for making sure the CRF meets its annual performance benchmarks'.

It's clear that this definition does not cover an overall responsibility to ensure a healthy sustainable pension system in the future.

Comptroller DiNapoli must be given 'full control' in order to do his job well. His responsibilities and targets must not be limited to the performance of just the asset side of the balance sheet.

Last but not Least
If the upcoming GASB rules are adopted, as expected, retirement plan funding ratios would drop dramatically. The Center for Retirement Research (CRR) found that if the new rules had been in effect in 2010, funding levels would drop from 76% percent funded to 57%.

In short the CRR-Report sets (in summary) the new pension tone:

  • Under the GASB standards, state and local plans generally follow an actuarial model and discount their liabilities by the long-term yield on the assets held in the pension fund, roughly 8 percent.
  • Most economists contend that the discount rate should reflect the risk associated with the liabilities and, given that benefits are guaranteed under most state laws, the appropriate discount factor is closer to the riskless rate.
  • The point is not that liabilities should be larger or smaller, but rather that the discount rate should reflect the nature of the liabilities; the characteristics of the assets backing the liabilities are irrelevant

In case of the New York City Employee Retirement System (ERS) new GASB rules would imply a decrease in funded ratio from 77% to 50%.......

Final Conclusions:
  1. Take adequate measures before its too late
  2. Get realistic and Honest, with ourselves and to others

I guess it all comes down on Honesty, as Billy Joel already stated..

Used Sources & Related links:
- NYSCRF 2011 Comprehensive Annual Financial Report (PDF)
- PEW Report (2012)
- Interactive ' funding of pensions and retiree health care' (2010)
- Wisconsin proves the lie of Pew pension numbers (2012)
- CRR Report: How would GASB affect pension reporting? (2012;PDF) 

Jan 17, 2012


Brainteaser...... What skills do you need to manage a pension fund?

Whatever brilliant your answer, I'm sure that the 'art of playing Monopoly' wasn't a part of it.

Yet, playing Monopoly and managing a pension fund  [ let's call it Pensionpoly] have a lot in common nowadays.

The main difference is that with Monopoly you can actually calculate the probability you land on one of the forty squares, while in Pensionpoly you THINK you can calculate the probability of the return of a certain asset class.

The similarities between Monopoly and Pensionpoly are that while executing a certain buying strategy (whether houses, hotels, stocks, bonds  or other asset classes), the  - short term - outcome also depends on the (financial) effects of the squares we land on and on a number of uncertain events as a result of drawing  Chance and Community Chest cards.

Monopoly probabilities
As described by Jörg Bewersdorff, the probability of landing on a particular square, basically can be calculated either on basis of Markov Chains or by means of applying the famous Monte Carlo method.

As an example here's the outcome of lending on a particular square on basis of a Monte Carlo simulation (more than 60.000 observations).

What's striking is that there's a 9.3% chance of ending up in jail.....

Of course, playing Monopoly takes a lot more than just calculating the probability on which square you'll be landing. Some excellent calculations have been made by Truman Collins (2005) , that include:
  • Long term probabilities for ending up on each of the squares
  • Expected income per opponent roll on all properties and other squares
  • Expected number of opponent rolls to lose or recoup mortgages

Back to Pensionpoly.... 
You can now practice you skills in playing Pensionpoly by downloading the Pensionpoly board game here.

Unzip (no viruses) the download (2Mb) file, click on 'Monopoly.exe' and start playing Pensionpoly in a minute.

Playing Pensionpoly is like playing Monopoly, with the following main differences:
  1. Cities are replaced by Asset Classes  
  2. Streets are investment categories in a certain Asset Class
  3. 'Buying Houses' is replaced by hiring (buying, appointing) Fund Managers (F-Managers); 
  4. Five Fund managers make no Hotel, but a Fund Team (F-Team)
  5. Chance cards are replaced by Asset (chance) cards
  6. Community Chest cards are replaced by Liability (chance) cards

Pensionpoly is a nice example of what is called Gamification. More info about  this subject on Pension Gamification.....

Have fun playing Pensionpoly and don't forget to play normal Monopoly with this application as well !

Sources and related links
- Bewersdorff: Monopoly in the view of mathematics (2002)
- German: Monopoly im Blickwinkel der Mathematik
- Collins: Probabilities in the Game of Monopoly (2005)

- Create your own Monopoly at Parkeeerbonnen (Dutch)
- Direct download Monopoly from Parkeerbonnen
- Markov Chains and Monopoly (Scribd)

- 18-karat solid gold Monopoly set (Museum of American Finance)

- - Download Pensionpoly (zip file)

Oct 17, 2009

Actuarial Sustainability Alarm

Recently the European Commission launched the 'Sustainability Report 2009", investigating the long-term (2010-2060)sustainability of public finances.

This report clearly shows the long-term economic effects of the aging society and the continuous increasing life expectancy.

Financing increasing pension and health costs in the next decades, will be a real challenge for almost all European countries. Even more, the current financial crisis and unsure financial outlook urge for severe short term measures in order to prevent much more unpleasant other measures in the next decades.

The report claims that the ability to meet public pensions liabilities is a higher long-term risk for governments than ever before and in most cases reform of member states’ pensions systems is 'must' and can no longer be delayed.

Although the report manly focuses on the increase (the so called delta) of the sustainability gap, I would like to take a look at the development of the aging costs in relation to the debt development of each country.

Development Aging costs
Let's start to take a look at the development of the public pensions liabilities (pension costs) and health costs from a slightly different angle as published in the report:

On average the total aging costs are increasing from 25% in 2010 to about 30% in 2060 on bases of a no-policy-change assumption.But there a countries (BE, EL, LU, SI) that grow way above this average to a level that's even above the current level of countries with high social standards, like Sweden and Finland.

To conquer this development, some member countries are trying to tackling the longevity issue by raising retirement ages.
Not only the pension costs increase, but also the projected long-term increase in healthcare spending is large and constitutes on its own a risk to sustainability.

Countries whose regimes are listed by the report as 'high-risk' in terms of sustainability are: The Czech Republic, Cyprus, Ireland, Greece Spain, Latvia, Lithuania, Malta, the Netherlands, Romania, Slovakia and the UK. In many countries the age-related expenditure is expected to climb quickly against existing financial imbalances.

Development gross debt ratio
As is clear from the next table, the mentioned next decades increase in health and pension costs, in combination with the unhealthy financial situation - due to the credit crisis - cumulates in a clear desperate debt situation for most of the European countries:

The table shows the government gross debt ratio in 2008 and 2009, and the projections for 2010, 2030 and 2060, once the costs of servicing debt and paying for age-related expenditure are taken into account.

As mentioned before, the long-term debt projections have been prepared under a no-policy-change assumption and in partial equilibrium. Given these assumptions, the projections are not robust forecasts and are not meant to be realistic scenarios of what may happen in the future.

The aim of the debt projections is to illustrate the long-term trends and the size of the required remedial action to avoid government debts to enter into an exponentially increasing spiral.

Actuary Involvement
It's clear that the debt and social costs developments are not heading in the right direction..... Actuary involvement to analyze, advice and create new social systems seems necessary.
Actuaries on the bridge, please!

- EC
- Sustainability Report 2009
- Report 2009
- Download: Maggid Excel tables Aging Costs and Debt Development

Oct 15, 2009

Best Pension Country 2009

There's a small country somewhere on this globe, called The Netherlands......

This small country does not only turns out to be the European and (probably) World Health Leader 2009, but - by the way - also happens to be the first Pension World Leader 2009, according to a new global research by Mercer.

You might wonder, who's the leader of that small country near the sea? His name is Mr. Jan Peter Balkenende. He's Prime minister for more than 7 years, is said to have no charisma and has proved to be able to lead a country that's loaded with hair-splitters and complaining people who disagree with each other on every possible subject.

Opposite to other European presidents like Sarkozy (France) or Berlusconi (Italy), who perform strongly on basis of their charisma and seem mainly interested in the fair sex, the Dutch Prime Minister Balkenende - just like the German Prime Minister Angela Merkel - is a modest no-nonsense leader, who walks his talk and gets the job done.

For sure he would be the best European President kandidate, to lead Europe through difficult times ahead on basis of dialog, respect and agreement.

Mercer Global Pension Index
Back to the Mercer Global Pension Index outcome.
The research is a first attempt to objectively compare the retirement income systems of eleven countries spread across the world.

Countries where rated in five grades:

Grade Index value Description
A >80 A first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity
B 65–80 A system that has a sound structure, with many good features, but has some areas for improvement that differentiate it from an A-grade system.
C 50–65 A system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.
D 35–50 A system that has some desirable features, but also has major weaknesses and/or omissions that need to be addressed. Without these improvements, its efficacy and sustainability are in doubt.
E <35 A poor system that may be in the early stages of development or a non-existent system.

The overall index value for each country represents the weighted average of the three sub-indices. adequacy, sustainability and Integrity.

Pension Index Outcome 2009
The results of the pension research clearly appoint The Netherlands as the undisputed Pension leader.

Remarkable however, is that none of the participating countries were classified with an A-grade (index value > 80). This can be easily explained by the fact that no one system is strong enough to withstand the challenges of an aging population.

Want to know more? Than listen to to Dr David Knox (WWP Mercer) discussing the Melbourne Mercer Global Pension Index

Or simply download the full report.

Interested in how The Netherlands 'did it'? Just contact Tim Burggraaf, one of the best worldwide consultants of Mercer in The Netherlands. Tim is a Master in Pensions and Life Assurance. No... he's not an actuary... but you wouldn't notice and moreover, he's one of the best interlocutors and speakers you can can get.

Sources :
- Melbourne Mercer Global Pension Index

Jun 6, 2008

Pension differences Japan & U.S.

In Japan, only 30.7% of respondents agreed or strongly agreed that employers will play a less significant role in pension provision in 20 years, the survey found. In comparison, 66.5% of U.S. respondents to an earlier survey agreed or strongly agreed.