Global Pension Crisis

As the generational bubble of the Baby Boomers begins to retire, it is increasingly evident that governments, corporations, and individuals have failed to adequately prepare for the obligations and needs of this giant cohort. Retirees are outliving actuarial life expectancies, pension liabilities are skyrocketing, pension plans are underfunded, and medical costs rise, the United States alone can expect unfunded liabilities to exceed $4 trillion.

Even while the American economy shows signs of sustained recovery, states and local governments will still experience sharp increases in pension fund payments through the next year or longer. Global Pension Crisis looks at this situation and offers practical advice for retirement plan managers and financial advisors, while also explaining how to strengthen pensions and prevent similar crises in the future.

• Offers a clear and comprehensive explanation of the current pension crisis for retirement fund managers, financial advisors, and economists
• Includes prescriptive guidance on how to strengthen the pension fund system and prevent another similar crisis
• Written by venture capitalist, entrepreneur, and former senior Wall Street executive Rich Marin

Foreword xi

Preface xiii

Acknowledgments xv

About the Author xvii

Chapter 1 Your Worst Nightmare 1

The Family 2

The Work 9

Where Does That Leave You? 15

Chapter 2 Dimensioning the Problem 17

Calculating the Sufficiency of Savings 18

Chapter 3 You Can’t Build Your Walls High Enough 43

The Problem of Retirement Income Security 43

Generational Warfare over the “Privilege Gap” 47

Feeding the World 51

Post-Crisis Policy Adjustments 58

The Demographic Monster Stalking Us 61

Chapter 4 Money Matters 63

Enter Modern Portfolio Theory 63

The Search for Alpha 65

The Age of Derivatives 67

The Birth of Hedge Funds 72

Alpha/Beta Separation 73

The Origins of Alpha 75

Static versus Dynamic Assets and Liabilities 75

Summing Up 78

Chapter 5 Reinventing Retirement 81

Defined Benefit Plans 81

Defined Contribution Plans 82

Who’s the Client After All? 84

The Changing Landscape 85

The Perfect Storm 87

Chapter 6 Alternatives Are Not Only for the Rich and Famous 93

Pension Assets and the Move Toward Alternative Assets 93

The Great Hedge Fund Debate 95

The Institutionalization of Hedge Funds 103

Chapter 7 The Long and the Short of It . . . Trust Me 115

Alpha from Operations 116

Operational Risk 117

Securities Lending History 119

The Securities Lending Market 121

Securities Lending Flow, Process, and Mechanics 124

Ratio Lending 131

The Rehypothecation Two-Step 132

Chapter 8 Liability-Driven Alpha 137

Painting the Recent Pension Landscape 139

Risks 140

Basic LDI Guidelines 142

Chapter 9 Power Tools for Pensions 145

Pension Benefit Guaranty Corporation 146

Factors Affecting the PBGC Insurance Programs 147

Plan Terminations 149

Pension Risk Transfer 150

Synthetic Mutual Fund Notes 161

The Role for Pension Funds 165

The Yale Model (the Illiquidity Premium) versus the All-Weather Model 167

Chapter 10 The Poverty of Nations (Apologies to Adam Smith) 175

Is There a Path to Salvation? 176

The Chilean Terrarium 179

Chapter 11 The Ultimate Solution 187

The Nation, State, Municipality, and Company 187

You as an Individual 191

Chapter 12 A Peaceful Night’s Sleep 195

What Our Family Looks Like Now 198

Concluding Thoughts 201

Works Cited 203

Index 209

RICHARD A. MARIN is a former Wall Street executive who currently serves as President and CEO of the New York Wheel project. He teaches finance and asset management at the Johnson Graduate School of Management at Cornell University, where he is a Clinical Professor of Asset Management. He is the founder of Beehive Ventures, a venture capital fund, and Ironwood Global, a distressed mortgage hedge fund.

The world is facing an economic time bomb.

As the generational bubble of the Baby Boomers begins to retire, it is increasingly evident that governments, corporations, and individuals have failed to adequately prepare for the obligations and needs of this giant cohort. Retirees are outliving actuarial life expectancies, pension liabilities are skyrocketing, pension plans are chronically underfunded, and medical costs continue to rise. The United States alone can expect unfunded liabilities to exceed $7 trillion over the coming years—and it's in better shape than many other developed nations.

Even as the American economy shows signs of sustained recovery, many states and local governments will still experience sharp increases in pension fund payments over the coming years. In fact, the next forty years of the world's economic life will be dominated by one underlying theme: how we deal with the retirement income security of a growing, aging, and longer-lived global population. It's a problem we can't ignore and can't outrun, impacting virtually everyone on Earth.

Global Pension Crisis looks at this situation and offers practical advice for retirement plan managers and financial advisors, while also explaining what people and nations can do to strengthen pensions, improve retirement outlooks, and prevent similar crises in the future. It looks at this looming disaster not only through a macro-level lens, but also provides a micro-level look at how the issue will impact individual retirement income and retirement planning.

Global Pension Crisis suggests difficult choices that must be made, as well as personal preparedness for anyone concerned about retirement. It explains worst-case scenarios if nothing is done to solve this looming problem, including the growing anger of young workers forced to toil to maintain their parents' lifestyle—a lifestyle they may find forever beyond their reach. This "Privilege Gap" that is being created may well lead to one of our next great challenges: avoiding generational warfare.

Global Pension Crisis argues that in an interconnected global economy, none of us can hide from this problem, and no single nation can solve it alone. But solve it we must, because this is much more than a financial problem we can fix with tax reform or kick down the road; it's a pervasive issue that directly affects the quality of life of our families, friends, and coworkers.

The world is facing an economic time bomb.

As the generational bubble of the Baby Boomers begins to retire, it is increasingly evident that governments, corporations, and individuals have failed to adequately prepare for the obligations and needs of this giant cohort. Retirees are outliving actuarial life expectancies, pension liabilities are skyrocketing, pension plans are chronically underfunded, and medical costs continue to rise. The United States alone can expect unfunded liabilities to exceed $7 trillion over the coming years—and it's in better shape than many other developed nations.

Even as the American economy shows signs of sustained recovery, many states and local governments will still experience sharp increases in pension fund payments over the coming years. In fact, the next forty years of the world's economic life will be dominated by one underlying theme: how we deal with the retirement income security of a growing, aging, and longer-lived global population. It's a problem we can't ignore and can't outrun, impacting virtually everyone on Earth.

Global Pension Crisis looks at this situation and offers practical advice for retirement plan managers and financial advisors, while also explaining what people and nations can do to strengthen pensions, improve retirement outlooks, and prevent similar crises in the future. It looks at this looming disaster not only through a macro-level lens, but also provides a micro-level look at how the issue will impact individual retirement income and retirement planning.

Global Pension Crisis suggests difficult choices that must be made, as well as personal preparedness for anyone concerned about retirement. It explains worst-case scenarios if nothing is done to solve this looming problem, including the growing anger of young workers forced to toil to maintain their parents' lifestyle—a lifestyle they may find forever beyond their reach. This "Privilege Gap" that is being created may well lead to one of our next great challenges: avoiding generational warfare.

Global Pension Crisis argues that in an interconnected global economy, none of us can hide from this problem, and no single nation can solve it alone. But solve it we must, because this is much more than a financial problem we can fix with tax reform or kick down the road; it's a pervasive issue that directly affects the quality of life of our families, friends, and coworkers.