Pension Date Outdated

Have you ever thought about your Pension Date?

Isn't it strange? We live in an era with an increasing (healthy) life expectancy. At the same time, there are strong individual old age health differences, resulting in strong individual 'Job Fit' differences.

Yet our 'Pension Date' is kept collectively fixed at an age of 60, 65 or 67.......

Working keeps you alive
The closer you get to your pension age, the more you realize that a full employment break at 65 (or whatever age) is crazy, unwise and even dangerous.

On top of, the life expectancy of the working population has proven (see: Towers Watson) to be significantly (up to two years!) higher than that of the population as a whole. In other words:

The longer you work, the longer you live....

(Non) Financial Pension Planning
More than just financial, Pension Planning is a common responsibility between the employer and the employee, to fit the employee's work (job) and working hours to his changing abilities as (s)he grows older. This way an employee is able to retire gradually. Now (s)he can adapt step-by-step to the changing new social and working environment, while still adding company value.

As the employer's workforce is - just like society - aging step-by-step, it's in the employer's interest to develop an integral HR-Investment Strategy and Action Plan for every to be defined relevant employee age-group.

Work Ability Index
An excellent way to start is to measure if employees are 'Job Fit' with the so called Workability Index.

Introduction to Workability for Employers from MeteorWorkability

 

Work as a burden?
Our present pension system still carries the characteristics of a social environment of the fifties of the last century. In this bible dominated time-frame, work is seen as a kind of burden.:

Genesis 3:19
In the sweat of thy face shalt thou eat bread, till thou return unto the ground;

for out of it wast thou taken: for dust thou art, and unto dust shalt thou return.

Nowadays more and more people are perceiving work as a challenge to develop themselves and others in a healthy way. You are not working to finally 'enjoy' your pension 'doing nothing', but you work because it gives life meaning and your pension plan helps you to financially manage your decreasing work-income and your increasing health costs as you get older and older in hopefully relatively good health.

Karl Lagerfeld, the Perfect Example
A strong example of such a new 'life policy' has recently been given by Karl Lagerfeld in an interview with Edie Campbell for Vogue. Karl is almost 80 years (!) old and besides one of the world's successful businessmen, fashion designers, artists and photographers, still vital and going strong in life.

View the next summary and enjoy Karl, regarding his view on retirement....




Change our Pension System
To cope with the aging workforce and to profit from 'elderly workers', employers have to:

• fit their employees' work (job) and working hours to their changing abilities as they grow older.
• This implies that employees have to be able to retire gradually.

A NEW PENSION SYSTEM
A new flexible pension system is needed to facilitate gradually retirement of employees:

1. Skip THE Pension Date
Therefore 'THE Pension Date' in our pension regulations has to be fully skipped as soon as possible and  be replaced by an individual, flexible and gradually applied partial pension.

2. Change Pension Payment Structure

• As from the (example) age of 50, every year the employee and employer agree on what income corresponds with the contracted activities of the employee and what the employee supplementary needs as pension income. 
• Each year, this required 'pension' income is deducted from his pension account. 
• The pension account of the employee yearly grows with the realized investment return of the pension fund and an age-dependent proportional part of the accounts of pensioners that died.
• A yearly pension communication benefit statement informs the employee about the expected development of his yearly pension in the future, in line with the agreement between the employee and the individual employer.

FINALLY...: IF NOT

If companies don't change their HR-Strategy and correlating Pension System, they and their employees will be confronted with unsustainable financial pension outcomes in the future, with as a result:
- Pension Cuts,
- Social Turmoil and
- Declining Profits.

It's the responsibility of every actuary to advice employers to take action in renewing their pension system to the demands of our modern and aging society.

If not.... actuaries will not be seen as advisors or helpers, but as the executioners of pension cuts.

Actuaries, it's up to YOU!

Perhaps some actuarial coaching may help us......

Sources/Related Links: 
- Mortality Experience (TW;PDF;2010)
- Does Your Job Fit Your Age?
- ABC-News: Aging: Work Longer, Live Longer
- Example Waikato: Strategies to retain staff in employment as they age
- VOGUE 2012: Karl Lagerfeld: Retirement Is Death
- Make your own free Cartoons at Pixton

ESM, Rate Rating Procedures

As of  October 8, 2012 the European Stability Mechanism (ESM) is a fact.

ESM is a European multilateral lending bank that lends money to euro Area Member Countries in order to facilitate them to restructure their debt and financial position.

Please note that the ESM lending is funded by debt only! 

ESM Rating

On October 12, 2012 Fitch Ratings has assigned the ESM a triple-A (AAA) Long-term Issuer Default Rating  and a Short-Term IDR of 'F1+'. The Outlook is Stable.

All Hosanna one would say. Well almost....

At the end of the FitchRatings document two small remarks state the following:

1. The rating is robust to downgrades of 'AAA' shareholders into the 'AA' rating category.
2. However, as Fitch has previously commented, in the event that Greece were to exit from the eurozone, the ratings of all sovereign and sovereign-rated entities in the eurozone, including the ESM, would be placed on Rating Watch Negative as Fitch re-assessed the broader political commitment to the euro and the potential contagion and financial implications of a Greek exit.

Implicitly the first remark implies that if individual AAA countries are downgraded below AA, the Fitch rating is no longer robust. As the probability that such a downgrade might happen, is substantial, it is strange that this 'downgrade risk' is not explicitly valued in the rating procedure.

The second remark implies that a significant risk (1Y default Risk Greece>30%; see also: Default Risk at Risk) as the exit of Greece, has also not been valued in the rating procedure. Not to mention that a possible default risk or exit of Spain has not even come into the mind of the FitchRating scientists. 

Conclusion
From a risk management and valuation perspective, leaving out both risks in an official rating procedure is ridiculous and looks more like a kind of 'lip service' instead of a serious rating procedure. Above all, it places rating procedures in a bad spotlight.
It's about time to rate the ratings agencies an their rating procedures. Who's willing (or dares) to do so?

Perhaps it's also time to fill in the Risk Manager vacancy in the ESM Organization Chart...... ;-)

Sources/Related Links

- ESMs FitchRatings document 2012 
- Presentation ESM
- ESM Organisation Chart

Aftermath European Crises Explained

Too Much of a Good Thing

We all know the expression "Too much of a good thing", but in practice, do we act in line with this life principle ?....... NO

I'll illustrate the fallacy of this "Too Much" principle with regard to two topics: Debt and Risk.

Debt

We all know that when it comes down to setting up a new business or investing in a sustainable development, a loan may help us to start up fast and facilitate growth.

So we might say that a deliberate chosen debt (a loan) stimulates the growth of a company or investment and also stimulates the entrepreneur or investor to take the 'right' decisions.

However when adding more debt (taking up more loans) doesn't generate the intented growth, in most cases a serious profit recovery plan is needed to keep the company a life or the investment profitable.

Unfortunately this is not the way we think in saving our western economy.

We keep adding debt while the growth of our economies keeps slowing down. This development is the main reason why the price of gold keeps rising.

Golden Proof
Although in 'normal' times the relationship between gold and country debt is not substantial, it's clear that in a 'no-growth increasing-debt policy' this relationship becomes clearly visible.

Despite of these clear signs, we keep adding debt-increasing measures, while the last signs op economic growth hope drown in the sea of debt.

When I showed the above slide on a Webinar (= online seminar) , one of the participants stated that investing in gold at this (current) price level would be risky.

I answered that the opposite was in fact true, as in historical perspective the market value of the Federal Reserve's Gold has fallen back to a backing up level of around 20-30% of the balance sheet.

So in fact the Fed has allocated 'too little of a good thing ' to restore trust in the financial markets.

In other words, Gold has still a great upward potential, as seen from a risk perspective.

Without going into 'too much' detail her, in fact, it's the other way around:

The relatively high price of Gold in Dollars,

is an indicator of the default risk of the Dollar. 

Looking at the dollar from this new perspective, it suddenly seems strange that we define the default risk of a country (currency) only with help of a country's (artificial) bond interest rate (more on my Blog: Default Risk at Risk) on basis of an also artificial  'risk free interest rate'.

Why not define the risk of a country's currency in terms of it's value to a neutral 'zero credit risk'  asset class, which gold in fact is.  I challenge you to come up with a new formula for the default risk of a country, based on the price of gold (e.g. London Fix=LF)... 

Default Rate Currency X = D_c = F( London Fix [Currency] )

where Currency=USD, GBP or EUR and F is a function which translates the actual London Fix price of Gold in a specific currency to a default risk. 

If no formula-volunteers step up, I'll come up with formula in one of my next blogs.


Risk
Now let's look from a  "too much of a good thing perspective" at Risk itself.
As we all know, a positive and optimistic look at life increases the probability of success in life. In examining Risk, Risk-Life is different.

When risks are far away and have not yet occurred, risk professionals as well as non-risk-professionals are inclined to underestimate risk. On the other hand, risks that occur now and then are (too) well known and overestimated. Finally unkonwn  hidden risks in the well known high frequency-low-impact risks are again often underestimated.


The Art of Judging Risk

A professional risk manager is more than a good goalkeeper in a professional football (soccer) club. His first responsibility is to identify and assess a potential risk together with his (management) team. Golden rule in this risk assessment process is to estimate risk in such a way in time that you never get into a underestimated position of a specific risk. This implies that when we assess new risks (e.g.  'hedge fund risks' or 'country default risks') we should not start from a zero risk position and adding risk in our models while we are making progress, but rather the other way around. This way of estimating risks will contribute to a much more professional and appreciated working method in the risk work field.

Enjoy exploring risk management. It's an everlasting activity you can't do too much!  Or can you?

Used Sources
- Clipproject.info