BC: What has been the single most important trend, development or event in pension money management over the past 25 years?

LB: People living longer and retiring earlier has more than doubled the cost of financing retirement. At the same time, poor equity market returns created a big gap between assets and liabilities when the market crashed in 2000. Many pension plans became underfunded, not because of low returns, but because they spent the gains from the 1980-2000 equity market boom on benefit increases and contribution cuts, on the assumption that what went up would keep going up.

This sequence of events shows that pension sponsors and pension members have only a vague appreciation for investment risk when making pension governance decisions.

Over the last 25 years, pension liabilities have typically doubled or quadrupled relative to the sponsor balance sheet, and taking more investment risk has meant that the deficiency risk per dollar of liabilities has risen at least twofold.

This has created far more total risk than most organizations can shoulder. Some have effectively repudiated part of their pension obligations, through bankruptcy re-organization or negotiated settlements. Others have chosen to push the problem into the future by projecting high and stable future investment returns, often from asset classes that are assumed to have better returns than listed markets, without the cyclical variation.

Finally, some sponsors are closing down their plans, contributing fixed amounts to employee pension accounts instead. That’s too bad, because pension plans are great for sharing demographic and financial risk.

BC: What drivers will shape the pension asset management industry over the next 25 years? Why?

LB: Better educated pension customers will fundamentally transform the concept of retirement and the retirement savings products they buy from the wealth management business. A fixed retirement age will become an anomaly, and the distinction between work and retirement will blur as people drift in and out of employment during their sixties and seventies.

The laws designed to encourage us to accumulate retirement savings will have to change to accommodate this gradual retirement. And with DB pension plans on the wane, there will be demand for hybrid plans that allow for financial and longevity risk sharing while achieving high efficiency in asset management and distribution. The financial industry will have to respond by creating more cost-efficient, total solutions for people who have no more time or inclination for doing their own financial planning than they have for fixing their own cars.

Customers will come to expect 3% to 5% annual improvements in what they pay for financial services. That will require industry investment in better portfolio and risk management systems, and more efficient reporting. Some of the building blocks are already out there(e.g. exchange-traded funds, lifecycle funds, online asset allocation and reporting for model portfolios, lower and fixed wealth management and financial advisory fees). Yet, the pioneers in some of these areas have not been able to garner the critical mass to be financially successful. I expect that to change. Wealth managers who are prepared for what I perceive to be an inevitable evolution will do well, even though anticipating new ways to earn future revenue often competes with reluctance to cannibalize present methods for generating current income.

Don Bisch is the editor of Benefits Canada.

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