This book is the latest in the series published by the Pension Research Council of the Wharton School in collaboration with Oxford University Press. Like earlier volumes, it remains true to the series' purpose of furthering the discussion on retirement security. The book is noteworthy in focusing on the pressing concern of how to manage retirement risk. Rather than merely concentrating on the problems, it seeks to expose solutions. To this end, the volume gathers a dozen papers under a single cover, reflecting a healthy mix of perspectives from practitioners and researchers alike. Each paper looks at a novel approach to enhance the financial security of workers in retirement.
The introductory chapter, co-authored by the book's editors, is worth reading. Succinct, but remarkably thorough, it establishes the framework of the book and brings together what might otherwise seem to be an eclectic collection of papers. Contributions are grouped under three themes that correspond generally to approaches centered on: increasing the financial knowledge of workers, pension plan design, and creative retirement risk financing products or tactics. The chapter presents detailed synopses of each of the volume's papers outlining their purpose, key points, analyses (if conducted), and conclusions. As such, the chapter successfully exposes the book's content, but it can also stand alone as a paper that reviews recent developments in the area of retirement risk management.
In view of the overall purpose of the book, this review focuses on what will be called the ‘take aways’. As such, the four papers that comprise the first part of the book offer the most immediately applicable information and underline the need to develop means to enhance the financial savvy of workers. The study by Robert Clark, Melinda Morrill and Steven Allen provides convincing evidence that short preretirement planning sessions sponsored by employers (the nine programs examined ran from 1.5 hours to 2.5 days) can increase the financial knowledge of workers and lead to changes in retirement-related decisions. The ‘asset/salary ratio’ (ASR) proposed by Brett Hammond and David Richardson offers the promise of a simple educational tool directed at workers. Using actual, and presumably accurate, pension plan data, the ASR provides an estimate of the income replacement rate at retirement based on assets currently accumulated under a DC plan. With this information in hand, the gap between current savings and target retirement income levels can be determined so that a strategy can be crafted to narrow the gap if needed. Unfortunately, the paper's authors do not discuss the practical applications of the ASR as an educational tool, though they do use it to gauge funding levels of a sample of TIAA-CREF's pension plan participants. The results of their analyses in effect provide an example of how to structure a ‘robust’ DC pension plan.
On the other hand, Anna Rappaport and John Turner's instructive examination of retirement planning calculators highlights the importance of exercising caution when interpreting the income projections generated by such software programs. An uninformed user of these calculators is thus likely to be misled. Finally, Lynn Pettus and Hall Kesmodel's chapter leaves the reader painfully aware of the need for independent financial advice in the workplace for DC plan participants. This is not, however, the stated purpose of the authors who examine the legislative intricacies of the provision of financial advice by employers, prior to, and after the passage of the Pension Protection Act in the US.
The second part of the book brings together four papers loosely grouped under the theme of pension plan redesign. With regard to ‘take aways’, the chapter by Joelle Fong, Olivia Mitchell and Benedict Koh provides an intriguing glimpse into how Singapore's Central Provident Fund, considered by many to be a model asset-based social security savings scheme, is trying to enhance retirement security using annuitization. The particular interest of this paper is that it offers a contextual analysis of a situation where a proposed publicly managed intervention, compulsory annuitization, may prove to be more beneficial than voluntary, private-market alternatives.
Of the remaining three papers related to pension design, the one by Craig Copeland and Jack VanDerhei implies rather optimistic outcomes for securing employee pension wealth despite the decline of employer-sponsored DB plans. Simulations conducted by the authors show that retirement income of those working for firms that have frozen their DB plans may be reduced only slightly, assuming the presence of enhanced employer contributions to a DC plan. In contrast, the chapter by Damon Silvers provides a refreshing reminder of the drawbacks of DC plans from a labor perspective. In this reviewer's opinion, the integration of works expounding alternate viewpoints enhances the volume's educational purpose.
Raimond Maurer, Olivia Mitchell and Ralph Rogalla also use simulations, but this time with the purpose of modeling life-cycle portfolio allocations. The novelty here, relative to previous work, is that the authors account for labor income risk. The effort of incorporating real-life aspects into such models leaves one hopeful that similar sorts of tools could become widely available to help individuals plan for retirement.
Innovations in retirement risk financing are the common theme of the last four papers. Of these, the chapter by Sterling Gunn and Tracy Livingstone ranks favorably on this reviewer's ‘take away’ list. This work exposes an original example of how the assets of one social security fund are being managed to comply with the mandate of securing the highest returns without undue risk. The Canada Pension Plan Fund uses the innovation of ‘risk budgeting’. The latter essentially refers to an integrated portfolio management approach that seeks to balance risk by considering the risk/return streams of investments rather than asset class. This happens in a context where the fund's shortfalls cannot be compensated by an increase in contribution rates.
Of the remaining three papers, one considers how employers can cope with longevity risk, another exposes initiatives taken by the mutual fund industry, and the third looks at a unique funding arrangement for retiree health care. More specifically, Igor Balevich reviews a number of approaches pension plan sponsors can use to offset longevity risk, including more familiar ones involving changes to plan design and transferring risk to insurers, and lesser known products such as longevity swaps. John Ameriks, Michael Hess and Liqian Ren use simulations to compare various new mutual fund products that offer periodic payouts or drawdown strategies. One ‘take away’ from this paper is that it is possible to create products that help individuals reach goals, such as leaving an inheritance, that differ from or are complementary to the more common goal of procuring a steady stream of income in retirement. Lastly, the paper by Aaron Bernstein offers an intriguing portrait of VEBAs, a rather distinctive type of funding scheme associated with the financing of the health care benefits of retired, unionized workers in the US.
I would recommend this book to anyone interested in pensions and retirement security. As a whole, it provides an excellent overview of new developments in the area of retirement risk management, yet each chapter it written so that it can easily stand on its own. Subtle explanations and background material make the book accessible both to the non-specialist and to a global audience.
