HOW A NEW DESIGN FOR EMPLOYER SCHEMES COULD HELP EASE THE PENSION BURDEN
NEW WAYS TO SUSTAIN INCOME AFTER RETIREMENT
Sustainable Income Plans take advantage of regulations that can turn asset liability management on its head
How do you get more for less? It is a challenge facing governments, employers and individuals who are all struggling to plug the retirement funding gap.
Kelly Coffing, Principal and Consulting Actuary at Milliman says of the firm’s Sustainable Income Plan™ (SIP): “For the same £10m contribution, an employer can provide up to 30 per cent more retirement income than they can with a DC scheme – without adding market risk or contribution volatility for themselves.”
In a DC scheme, the spend-down phase is inefficient because people do not know how long they will live. A SIP pools longevity risks, allowing the plan to provide lifelong benefits to all participants and basing funding on average life expectancy. In addition, participants in a DC scheme generally shift to more conservative asset allocations as they age, sacrificing returns in the process. By pooling longevity risk and maintaining a balanced portfolio over time, the SIP provides more retirement benefits per pound of contributions.
A new twist on an old design
In the US, Milliman was one of the first to take advantage of regulations published in September 2014 to “turn asset-liability management on its head… paving the way for true retirement innovation”. It launched its SIP this year.
While this may seem like a novel solution to the ageing problem, the idea has been around for decades.
“This design has been legal in the USA since 1953,” continues Ms Coffing. “However, in the original plan design, benefits moved up and down with market returns without any protection against volatility. Current retirees do not want that degree of uncertainty.
“It is only recently that we have been allowed to modify this 60-year-old plan design to smooth out the benefit ride that had been a hurdle to the success of these plans. Milliman has put a mechanism in place to hold back some of the upsides so that it can protect benefits when there are downsides. By embracing market volatility, the SIP can provide lifelong income to participants without exposing employers to market risk or contribution volatility.”