Pension for Contribution

People are lost if it comes down to their pension. A recent (2012) Friends Life survey found that 68% of Britons do not know the collective value of their pension funds.....

This result is in line with a Dutch 2011 survey, that concludes that 66% has no knowledge of their pension.

Pension illiteracy is clearly a worldwide phenomenon. Pensions are a 'low interest' product. Unfortunately - nowadays - in the double sense of the latter words.

As an actuary, people often ask me at a birthday party : I'm paying a 1000 bucks contribution each year for my pension, but does it pay out in the end? Can you tell me?

Unfortunately most actuaries, including myself, answer this question by telling that this is a difficult question to answer straightforward and that the pension outcome depends on topics like age, mortality, return, inflation, gender, indexation, investment scheme, asset mix, etc., etc.....

Simplifying

To make a breakthrough in this pension communication paradox, let's try to create more pension insight with a simple approach. But remember - as with everything in life - the word 'simple' implies that we can not be complete as well as consistent at the same time. After all, Kurt Gödel's incompleteness theorems clearly show that nothing in life can be both complete and consistent at the same time.

Thanks to God and Gödel, we can stay alive on this planet by simplifying everything in life to a level that our brains can comprise. We'll keep it that way in this blog as well.

How much pension Benefits for how much contribution?

First thing to do, is to give the average low pension interested person on this planet an overall hunch on what a yearly investment of a 1000 bucks(first simplification: S1)until the pension age of 65 year (S2) delivers in terms of a yearly pension as of age 65 in case of an average pension fund.

If we state 'bucks' here, we mean your local general currency. We denote 'bucks' here simply as $, or leave it out. So $ stands for €, ¥ , £ or even $ itself.

Now let's calculate for different pension contribution start ages (S3)what a yearly contribution of $ 1000 (payable in months at the beginning of each month; S4), pays back in terms of a yearly pension (payable in months at the end of each month; S5) on basis of a set of different constant return rates (S6). The calculation is on a net basis (so without costs; S7), a Dutch (2008) mortality table (S8) and without any inflation (S9), any pension indexation (S10), any contribution indexation (S11), or any tax influence (S12).

Here's the simple table we're looking for:

TABLE 1

Yearly Pension at age 65 on basis of 1000 yearly contribution
Pension Indexation=0%, Contribution Indexation=0%, Inflation: 0%
Start	Net Yearly Return Rate
Age	0%	1%	2%	3%	4%	5%	6%	7%	8%
25	2692	3669	5019	6898	9521	13192	18336	25553	35681
30	2345	3113	4134	5503	7342	9812	13133	17601	23612
35	1999	2584	3335	4304	5555	7171	9257	11949	15421
40	1654	2084	2614	3273	4092	5109	6370	7933	9867
45	1311	1610	1964	2388	2896	3502	4225	5085	6107
50	972	1163	1380	1632	1921	2254	2635	3072	3570
55	638	744	860	989	1132	1291	1465	1657	1868
60	312	355	400	448	499	554	612	674	738

In a graphical view on a logarithmic pension benefits scale, it looks something like this:

Example

To illustrate what is happening, a simple example:

When you join your pension fund at age 40 and start saving $ 1000 a year (the first of every month: $ 83.33) until your 65, you'll receive a yearly pension benefit of $ 4092 yearly ( $ 341 at the end of every month) from age 65 of, as long as you live.

From this table, we can already draw some very basic conclusions:

• To build up a substantial pension, it pays out if you start early in life
• The pension outcome is heavily dependent on the yearly return of your pension fund
• Most pension funds operate on basis of a 'general employee and/or employer contribution' instead of individual employee contributions.
  This implies that younger employees pay more than they should have paid on an individual basis and older employees less. In other words, younger employees subsidize older employees. How much more, you can derive from the tables above and by comparing the individual contributions to the general contribution level of the pension fund.

Pension Indexation

As we all want to protect our pension against inflation, let's calculate the outcome of a 'real pension' instead of a 'nominal pension'. As long term yearly inflation rates vary between 2% and 3%, we make the same calculation as above, but now the yearly pension outcome (as from age 65) will be indexed with 3% (fixed) at the end of every year and the yearly contribution paid, will also be yearly indexed with 3%.

Here's the outcome:

TABLE 2

Yearly Pension at age 65 on basis of 1000 yearly contribution
Pension Indexation=3%, Contribution Indexation=3%, Inflation: 0%
Start	Net Yearly Return Rate
Age	0%	1%	2%	3%	4%	5%	6%	7%	8%
25	3687	4914	6566	8814	11889	16112	21933	29978	41124
30	2947	3859	5051	6624	8707	11468	15138	20021	26526
35	2309	2968	3803	4872	6241	7994	10240	13119	16809
40	1760	2218	2781	3479	4344	5413	6735	8368	10382
45	1288	1590	1949	2381	2897	3515	4251	5127	6168
50	882	1066	1277	1523	1807	2134	2512	2944	3440
55	536	633	741	862	998	1149	1316	1502	1706
60	243	281	321	364	411	461	515	573	634

To get grip at the comparison between a real and a nominal pension, we express the real pension (3% Indexed Pensions and Contribution) as a percentage of the nominal pension:

TABLE 3

Yearly Pension at age 65 on basis of 1000 yearly contribution
'3% P&C-Indexed Pensions' as percentage '0% P&C-Indexed Pensions'
Start	Net Yearly Return Rate
Age	0%	1%	2%	3%	4%	5%	6%	7%	8%
25	137%	134%	131%	128%	125%	122%	120%	117%	115%
30	126%	124%	122%	120%	119%	117%	115%	114%	112%
35	116%	115%	114%	113%	112%	111%	111%	110%	109%
40	106%	106%	106%	106%	106%	106%	106%	105%	105%
45	98%	99%	99%	100%	100%	100%	101%	101%	101%
50	91%	92%	93%	93%	94%	95%	95%	96%	96%
55	84%	85%	86%	87%	88%	89%	90%	91%	91%
60	78%	79%	80%	81%	82%	83%	84%	85%	86%

From this last table we can conclude that if you start saving for your pension below the age of 40 your indexed savings weight up to the indexed pension. Above the age of 45 it is the other way around.

The above figures are the kind of figures (magnitude) you'll find on your benefits statements. You can compare in practice whether your benefit statement is in line with the above tables....

The Inflation Monster

In the last given example, pension is 3% inflation protected as from the moment of retirement.

However, if pension is not also yearly fully indexed (in this case: 3%) during the contribution period, there still is a major potential inflation erosion risk left.

In this case it's interesting to examine what the value of a 3% indexed pension in combination with a 3% indexed contribution is worth in terms of actual money, as inflation would continue at a constant 3% level each year. Here's the answer:

TABLE 4

Yearly Pension at age 65 on basis of 1000 yearly contribution
Pension Indexation=3%, Contribution Indexation=3%, Inflation: 3%
Start	Net Yearly Return Rate
Age	0%	1%	2%	3%	4%	5%	6%	7%	8%
25	1130	1507	2013	2702	3645	4939	6724	9190	12607
30	1047	1371	1795	2354	3094	4076	5380	7115	9427
35	951	1223	1567	2007	2571	3293	4219	5405	6925
40	841	1059	1328	1662	2075	2586	3217	3997	4959
45	713	880	1079	1318	1604	1946	2354	2839	3415
50	566	684	820	977	1160	1370	1612	1890	2208
55	399	471	552	642	742	855	979	1117	1269
60	210	242	277	314	355	398	445	494	547

What we notice is a substantial inflation erosion effect as the pension fund participants get younger.

Let's zoom in on an example to see what we can achieve with these tables.

Example

• From table 2 we can conclude that - at a 4% return rate - a 40 year old starting pension fund member, with a $ 1000 dollar yearly 3% indexed contribution will reach a 3% yearly indexed pension of $ 4344 yearly at age 65.
• From table 4 we can subsequently conclude that, based on an inflation rate of 3%, this $ 4344 pension has a 'real' value of $ 2075, if it's expressed in the value money had when the participant was 40 years old (so, at the start).
• From table 4 we can also conclude that in order to 'compensate' inflation erosion for this pension member, the pension fund has to achieve a return of around 7.4%.
  This follows from simple linear interpolation:
  7,4% = 7% + 1% * (4344-3997)/(4959-3997)

I'll leave other examples to your own imagination.

The effect of a constant inflation on a pension is devastating, as the next table shows

TABLE 5

Inflation Erosion Pension indexation=3% as of age 65 Contribution indexation=3% Inflation=3% Start Age Inflation Erosion 25 69% 30 64% 35 59% 40 52% 45 45% 50 36% 55 26% 60 14%

From table 5 it becomes clear that Inflation erosion is indeed substantial. If you have a fully indexed pension from age 65 (who has?) of and you're N years away from your retirement, an inflation of i% will erode your pension with E%. In formula:           Example Set inflation to 3%. If you're 40 years old and about to retire at 65, you've got 25 years (N=25=65-40) ahead of you. If your pension of let's say $ 10,000 a year is not indexed during this period, you can buy with this $ 10,000 no more than you could buy today with $ 4,800.

Your pension is eroded due to inflation with 52% = 1- 1.03^-25. So only 48% is left.....

Finally

I trust these tables and examples contribute a little to your pension insight. Just dive into your pension, it's financially relevant and certainly will pay out!

Remember that all results and examples in this blog are approximations and simplifications on a net base (no costs or taxes are included). In practice pension funds or insurers have tot charge costs for administration, asset management, solvency, guarantees, mortality risk, etc. . This implies that in practice the results could differ strongly with the results as shown in this blog. The examples in this blog are therefore for learning and demonstration purposes only.

The above calculations were made in a few minutes with help of the Excel Pension Calculator that was developed in 2011 and updated in 2012.

With help of this pension planner you can calculate all kind of variations and set different variables, including different mortality tables (or even define your own mortality table).

You can download the pension calculator for free and make your own pension calculations.

More information about pension calculating with this simple pension calculator at:

MORE ABOUT EXCEL PENSION CALCULATOR

Enjoy your pension, beware of inflation....

Links & Sources:

- Download Excel Pension Calculator (virus free)

- The scourge of multiple hidden pension pots (2012)

- Survey:Individual Differences in Pension Knowledge (2011)

- Kurt Gödel's incompleteness theorems

- EU Inflation Monster

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 

Humor: Penguin Risk Management

Life ain't easy ... sometimes.... Especially not... when you're a risk manager....

Changing Professional Field of Risk

In order to make any kind of progress in our human - penguin like - society, we'll have to take risk...

Part of a risk manager's task is to check regularly whether parties, (e.g.  asset managers)  are acting in line with the defined risk mandates (compliance). 

It's more or less generally accepted that a risk manager's first task is to prevent, control and optimize risks from a mainly defensive point of view.

However.....

we live in a 'risk growing world' where (state) regulators and accounting standard boards increasingly prescribe all kind of risk controlling measures.

In this world it becomes more and more important that a risk manager also advices actively on where and when to take more risk, instead of less risk.

Zero Risk Attitude: Death by Risk Management

Taking less and less risk gradually leads to a zero risk position.

An (on top of)  'zero risk attitude' of a risk manager can therefore become the nail in the coffin of any financial company. As without risk there's no profit, and without profit any financial company is doomed.

So skip any form of 'scary risk management', face risk as it is and changes in time. Moreover, develop and demand a positive, realistic and dynamic risk view of yourself and your professional environment.


Risk, Part of Evolution
History shows that taking major risks is essential in successful exploring new areas.

A few examples:

• Discovering America
  The (re)discovering of America by Columbus took a lot of lives. Shipwrecks, bad weather, diseases and fights took its toll.
• Radioactivity
  Discovering the properties and applications of radioactivity took many lives. Example : Marrie Curie died as a result of prolonged exposure to radiation.
• Exploring Space
  Many astronauts died on the the Gemini, Apollo an shuttle projects About 5% of the astronauts that have been launched, have died.

Future Risk Space Programs: Dream Chasing
At the start of the Shuttle program, NASA managers thought (calculated?) there was only a '1-in-100,000' chance of losing a shuttle and its crew.
Today, engineers believe this probability was in fact closer to 1 in 100. 
NASA’s basic requirement for new commercial crew vehicles is a probability of 1 in 1000 (!).

On basis of these modern risk standards, the original Apollo project back in 1961 would not even have started.

Looking at our 'Exploring Space' ambitions, it's likely that due to higher risk standards, cost of new space programs will increase to a level where no profitable exploitation (at all) is possible.

In other words: Profitable exploitation of future crewed flights to other planets will turn out to be a real 'Dream Chaser'.

Let's be fair, after 1972 we've never been back to the moon. Yet, plans to go to Mars are presented as 'business as usual'....

At the same time risk standards increase and costs explode.
Forget about going to Mars at current risk standards!

Financial Risk Equivalent

Just like in the space industry, risk standards in the financial industry have increased. From old demands, like the 2.5% one year default rate (97.5% confidence level)  of Dutch pension funds to the 1.0% - 0.5% default rate in the insurance and 0.1% - 0.05% in the banking industry.


In general, raising default risk standards by lowering default levels is a dead end street. It's much more effective to tackle other risk topics like controlling 'systemic risk' and 'company size' and accept risk as a fact of life.

Penguin Behavior
Perhaps - regarding risk and size - we can learn from penguin behavior. Although king penguins are highly gregarious at rookery sites, they usually travel in small groups of 5 to 20 individuals.

Just like we humans, penguins have to take risk in order to survive. In our research for risk we have to accept risk, and therefore loss, as a necessary unavoidable part of (financial) life.
Let's learn from penguin Risk management.....

--------------------------------------------------------------------------------------------

Conclusion

Let's wrap up with penguin wisdom:
To survive as society on the long term, we need to create smal(ler) companies with a limited exposure to systemic risk and a higher risk attitude.

Risk is a part of life, explore but don't kill it, as it will kill you...


Links & Used Sources:
- Apollo by numbers
- Percentage of fatal space flights
- Analysis: NASA underestimated shuttle dangers 
- Certified Safe (2011)
- Dream Chaser
- POLE Penguins Comic Strip

Aftermath

Mars?  Perhaps in 2525?

Worldwide Country Bonds Overview

Country Bond Rates are decreasing. As global debt is still increasing, trust is declining. 'Counterparty Safe Cash'  is what's becoming more and more important. Prepare for getting used to negative interest rates!

BTW: If you can't hold your breath, go to the end of this blog and click one of the tabs to get an updated worldwide overview of actual country bond interest rates.

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What's up?

Countries with a high inflation (e.g. Brazil, India, China) or countries (e.g. Portugal, Ireland, Spain) that can't control and therefore have to finance their increasing debt at high interest rates, still show optical interesting interest rates for investors... So it seems, as these relative high interest rates are in fact 'compensation for inflation' or 'hidden default premiums'.

And of course we have countries (e.g Greece), who's interest rates show that they have in fact gone broke.

Unfortunately non of the EU countries dares to pull the plug...  From a risk management perspective: Living in a nuclear financial death zone, apparently is a better option than pulling the trigger in the knowledge that not only your Greek brothers but also YOU will be 'financial dead' for sure.....

Still the Greeks get away with this non compliance strategy, let's call it:

Greek Risk Management

Last but not least we have the strong countries like Denmark and Germany with low interest rates. These countries have to carry and finance their weaker brothers short term. So it all comes down on cash and counterparty risk.

The rhetorical question in this European business case is:

Can Germany finance a Europe that fails to restructure their debts in a sustainable way?

Country Bond Interest Rates in alphabetical order

Let's examine those interest rates as reported by Bloomberg, at the end of July 2012 in alphabetical order:

It's clear that country bonds interest rates vary widely across countries.

White spots in the table imply, there's no (Bloomberg) data available.

Let's bring some order in this bond-muddle, by ranking the countries on basis of their 10Y Bond yield.

Country Bond Interest Rates sorted by '10Y' Bond Rate

From the above chart it is clearly visible that

• Germany, Denmark and The Netherlands already enter the negative interest rate zone for 1 and 2 year bonds.
• Greece, with a phenomenal interest rate, is is completely burned up
• The Eurozone is split up in good and bad performing countries
• A strong, sustainable and relatively independent country like Switzerland has 'low short term', as well as 'low long term' interest rates.
  This must for sure be a warning to every investor to estimate long term interest for other countries  much higher on the long term. Perhaps the relatively higher long term interest rates of other countries resembles the implicit (extra) inflation expectation on the long run.

Mattress Money

As debt keeps increasing, economic growth in western countries is limited and modest inflation continues, short term interest rates will stay low for the near future (until the end of time inflation beast is released).

With an increasing 'cash demand' from weak performing countries, we have to learn to get used to negative interest rates in relatively more strong performing countries.

In other words, consumers and professional investors have to pay to put their money in the bank. Why not keep your money under the mattress?

For consumers this might perhaps be a risky (theft) solution  to consider. Professional investors however, have to reduce counterparty risk which demands first class collateral assets.

Therefore "mattress money" is no option for professional investors and (increasing) negative interest is the price these investors will have to pay for keeping more and more cash as debt and risk keep rising.

Desperate advice ;-)

Perhaps - just like World War II was financed by War Bonds - we should appeal to private investigators and consumer to fund the government in their desperate war against debt.... government debt ...

 But then.... who would be willing to invest?

Actual Country Bonds Interest Rates

Are you interested in following the actual country bonds interest rates, than bookmark this blog or the special Actuary-Info Actual Country Bond Rates Page, and come back once in a while to view the latest bond interest developments by clicking on one of the next tabs (have a few seconds patience, loading 150 (!) bond rates takes some time).

Actual Country Bond Interest Rates (Alphabetical)

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Actual Country Bond Interest Rates ('10Y' Sorted)

Update 2013 
Bloomberg stopped publishing a lot of bond rates. That's why several bond rates are missing. Sorry.

Hope you enjoyed this holiday blog...

Related Links/Sources

- View & Download 'Google Country Bond Rates Spreadsheet'
- Actuary-Info Actual Country Bond Rates Page

- View Google Country Bond Rates (Alphabetical)HTML and Bookmark!

- View Google Country Bond Rates ('10Y' Sorted)HTML and Bookmark!

- Bloomberg, Worldwide Best Financial Data Supplier 

- IS - LM Model Wikipedia

- On Negative Interest Rates (2012)

Humor: Actuarial Marriage Advice

It's an intriguing topic: Do you indeed live longer if you marry a younger woman?  Or is this kind of party talk total nonsense?

This time an 'actuarial marriage counseling blog' that gets serious  about this hilarious topic of age differences and mortality......

Research speaks...

While it had long been assumed that women with younger husbands also live longer, in a 2010 study Sven Drefahl from the Max Planck Institute for Demographic Research (Rostock, Germany) has shown that this is not the case.

Some interesting an remarkable conclusions from Drefal's study:

• A woman's life expectancy is shorter the greater the age difference from her husband, irrespective of whether she is younger or older than him.
• However, the younger his wife, the longer a man lives. 
• Women marrying a partner seven to nine years younger, increase their mortality risk by 20% compared to couples where both partners are the same age. 
• But the mortality risk of a husband who is seven to nine years older than his wife is reduced by 11%.
   

Drivers

It's strongly doubtable if this mortality advantage of a man marrying a younger wife, is the reason why, according to Okcupid, a man - as he gets older - searches for relatively younger and younger women.

In general a man of age X searches a women with a lower limit age Y of :

Y = 0.5X + 7

Men, don't search a woman beneath this lower limit age border, unless you want to end up as sugar daddy........


What about women?
For women it's quite different:

In general women search for an older man. But as they grow older this effect shrinks.

Conclusion

Actuarial marriage advice is rubbish...
Don't follow statistics if you want to marry someone, follow your heart! ;-)

Related Links & Sources:
- Max Planck Institut: Marriage and life expectancy (2010)
 - OKCUPID: The Case For An Older Woman
- CBS News :Age gap Deathly (2010)
- Sugar daddy diagram ;-)

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) 

Gold as Investment

Financial institutions have to optimize ‘Risk – Return’ and diversify their portfolio. This (strongly interactive) presentation by CEO and Actuary Jos Berkemeijer, supports the power of Gold as the best asset class to optimize ‘Risk – Return’ in a given portfolio.

Just widen your knowledge about monetary gold by examining  the next  presentation given on June 19 2012 as a 'Johan de Witt Lecture' before 60 in gold interested actuaries of the Dutch Actuarial Association (Actuarieel Genootschap, AG), the professional association of actuaries and actuarial specialists in the Netherlands.

With the help of a button (""ACTuary NOW" ), Jos Berkemeijer calls for action by actuaries on several main issues . 

Gold as InvestmentGold as Investment