Speaking at the annual Mercer Pension Outlook and Fearless Forecast on Tuesday, Malcolm Hamilton commented that the 1990s represented “the last happy time for pension plans in Canada,” because real interest rates stayed above 4% for the decade.
By contrast, said Hamilton, a partner with the company, “What the lower interest rates today mean is that we’re in a world where safe, guaranteed, reliable, inflation-protected pensions—which is what, frankly, people need and look for in retirement plans—cost twice what they did 15 years ago.”
Hamilton said Ben Bernanke, chair of the U.S. Federal Reserve and one of the world’s foremost experts on the causes and mistakes that led to the Great Depression, was instrumental in implementing policies that helped ensure the 2008 economic crisis didn’t lead to a repeat of the Great Depression. But, said Hamilton, the world is now mired in what he described as “a barely contained depression”—an unprecedented economic event where historical actuarial and economic modeling can’t predict an end date or a way out.
Hamilton said that interest rates are likely to remain low for an extended period of time, leading to prolonged economic uncertainty across the globe. It’s not clear on when the current economic environment will improve, or what the world will look like when it does.
“What this means is that pension plans are suddenly doing something that is dangerous and expensive—promising lifetime, secure, adequate incomes. It’s a wonderful thing for plan members to have, but it’s a terrible thing for plan sponsors to have to deliver,” he said.
Hamilton commented that pension plans need to be prepared for this long period of uncertainty by ensuring they are designed and run in a sustainable manner—by getting through the rough years rather than just focusing on building for what he called “the mystical, actuarial long term,” where economic conditions are ideal and markets do well.
“We should be doing way more stress testing of pensions than most of us do,” said Hamilton. “And we should always be asking, If we get 20 lean years, can the system survive and prosper? Surviving lean years doesn’t mean that members prosper; it means the plan survives.”
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