When it comes to retirement preparedness, one of the most important tools that individuals have at their disposal is pension plans. But too many Americans don't have access to such plans, and even those that do are falling victim to prolonged low interest rates.
So how can this country improve the retirement system, and are there lessons that America can learn from pension plan systems in other countries?
Those were among the questions posed at the recent "Retiring around the Globe" event sponsored by the Financial Services Roundtable. The roundtable, held in December, featured expert commentary from Sen. Orrin Hatch (R-Utah), incoming chairman of the Senate Finance Committee; Pablo Antolin, lead author of OECD's Pensions Outlook 2014; Jim McCaughan, CEO at Principal Global Investors; Ed Farrington, executive vice-president at Natixis Global Asset Management; Edmund F. Murphy III, president of Empower Retirement; and Gov. Tim Pawlenty, CEO of the Financial Services Roundtable.
The purpose of the roundtable event was to discuss retirement plan options around the world, examine some that work and others that don't, and evaluate how the U.S. system compares overall. The general consensus was that the U.S. system does have several valuable lessons to offer, the possibility of a 'retirement crisis' is a definite reality unless some changes are made to the present system.
Dire Warnings
Hatch opened the roundtable remarks, and spent the first half of his comments addressing the Senate Finance Committee's agenda for 2015 and issues related to the nation's tax code and foreign trade. There wasn't a lot of good news in those remarks. But when he turned his attention to pension plans and the retirement system specifically, the warnings got especially dire.
"I'd like to take a moment and comment on the multiemployer pension legislation that is included in the so-called CRomnibus that the Senate passed over the weekend," Hatch said. "If there are still those who doubt the existence of a serious pension problem in America, this event is a wake-up call to say the least.
"At the request of multiemployer pension plan managers, employers who contribute to multiemployer pension plans, as well as many unions representing employees, the CRomnibus included a provision that gives pension plan trustees the power, in extreme cases, to cut earned pensions in order to avoid plan insolvency and larger cuts later," Hatch explained.
(Pundits call the spending bill a CRomnibus because it is a combination of an omnibus bill, as typical government spending bills are, and a continuing resolution [CR], which funds the government when the lawmakers can't come to a deal. In this case, the Homeland Security Department is subject to the CR; its funding will expire in February.)
"This is a sobering moment for the pension community," Hatch noted. "And beyond the hardship some retirees inevitably will experience, it highlights both the challenge of delivering on the promise of lifetime retirement income and the stakes for retirees if the system fails."
The SAFE Retirement Act
To help prevent such likelihood, Hatch said the SAFE Retirement Act (Secure Annuities for Employee Retirement Act) encourages the use of annuities in 401(k) plans.
"First, we remove obstacles to adding annuity-purchase options to 401(k) plans, and second, we provide employers a liability safe harbor. That way, employers are encouraged to add annuity options to their plans and employees are encouraged to use them," Hatch said.
The SAFE Retirement Act would address the problems of poorly funded state and local defined benefit pension plans, Hatch said.
"In a SAFE Retirement Plan, employers purchase annuity contracts for their employees each year," Hatch said. "Pension costs are stable and affordable, and employees receive annuity contracts for lifetime pensions that are fully portable, 100 percent vested, and can never be underfunded."
How Real is a 'Retirement Crisis'?
An important theme of the roundtable was just how likely a true retirement crisis is for this country, and if so, what steps can be taken to avoid it.
Jim McCaughan, CEO of Principal Global Investors said, "in general, I do not see our system as being in crisis, but if there is a crisis lurking the reason is low interest rates."
McCaughan warned that we should expect interest rates to remain low for the next several years, and in an extended low-rate period, "many direct benefit plans will simply become unsustainable. At the individual level, this is a uniquely difficult time to turn retirement savings into retirement income. Investors need new solutions, along with education and advice to make good choices."
