I am a Pension Plan.

Even though my work focuses on defined contribution (DC) plans, I try and keep current of what’s going on with defined benefit plans. So I am aware The Society of Actuaries has published updated mortality tables for those plans, and sponsors need to use them to determine their U.S. pension plan obligations. I’ve read that the new tables could increase pension liabilities by 6-9%. And I’ve seen a flurry of activity in response. Actuaries are working with plan sponsors to evaluate options such as offering lump sum windows to their terminated vested members, or transferring pension obligations to insurers willing to assume the liability.

So while I was aware of these changes, I didn’t believe a change in mortality assumptions directly impacted me – I’m not a defined benefit plan specialist. But then it occurred to me that for the “Alan Vorchheimer Pension Plan”, this is an important development.

What I mean is that everyone wants to save enough during their working lives to ensure they have adequate post-employment income. So, in fact, I am a Pension Plan. And as my own Plan, the increased longevity these tables reflect means that, barring other potential solutions such as working longer or investing more aggressively, I need to save more each year if I want the same level of retirement income. It came to me that I need to think like the CFO concerned with the impact of increased retirement plan obligations on future cash flow – yet no one’s explaining this to the average person.

I’ve read many articles on the updated mortality projections with no mention of DC plans. No one is pointing out that we need to apply the same principles used in a defined benefit plan to our individual DC accounts. Every one of the major changes impacting defined benefit plans (historically low interest rates, volatility in financial markets, and increased longevity) impacts the Alan Vorchheimer Pension Plan and my ability to save enough to provide a secure retirement.

Perhaps each time an organization discusses the impact of a change in their plan’s actuarial assumptions, they should consider the impact on each employee’s individual plan and make an effort to communicate this to the population at large.  Or introduce tools like our own Savings Insight as the opportunity to have an individual actuarial valuation each year.  Or demonstrate the difference in terms of projected retirement income using current account balances.

As a start, thinking about oneself as a Pension Plan puts a whole new light on things.  At least it did for me.

 

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