Fifty years ago, if you asked Americans how they mainly saved for retirement, chances are they'd answer: "my pension." That's no longer the case. After surging in the post-World War II years, corporate pensions have been on the decline in the US over the past couple decades, largely driven by a stricter regulatory environment and long period of low interest rates, says Goldman Sachs' Michael Moran. With fewer corporations offering comprehensive pension plans, Moran says it will be up to individuals to carry the burden of retirement savings. "It's going to be falling on a lot of individuals in terms of saving for retirement, investing money themselves and then realizing how long they're going to have to use that money in retirement."
This podcast was recorded on April 13th, 2018.
The views and opinions expressed herein should not be construed as an offer to buy or sell any securities and such views and opinions may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. This information may not be current and Goldman Sachs has no obligation to provide any updates or changes. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by any Goldman Sachs entity. The portfolio risk management process includes an effort to monitor and manage risk but does not imply low risk.
Copyright 2018 Goldman Sachs & Co. LLC. All rights reserved.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This year's exchange,
The Goldman Sachs, where we discuss developments currently shaping markets industries in the gulf
economy, I'm Jake, Stuart, Global, had of corporate communications here the fir tree will target.
What's glamour, pensions used to be,
with the way most American save for retirement. That's not the case, any more
why that is in a whole lot more were joined by Might Moran a pension strategist in Goldman Sachs Asset, it
whose recently come out with some proprietary findings on the pension landscape. Mike welcome the programme greatly.
Jake thanks for having me,
when we hear the word pensions when we actually talking about help us understand the pension landscape today between defined benefit.
Contribution and the rest. When we talk about paying
and I think, for a lot of people when they hear that
passion they think about. Therefore, one Kay the defined contribution plan that many individuals have today as part of their employment, what were really
Talking about here today are defined, benefit plans and these or play,
and that used to cover a lot of individuals who worked for companies as well as some time
in the governmental sector, where you would work for them
employer for a long period of time and then, when you
tired. They would send you a monthly check. You'd get
a thousand dollars or two thousand dollars every month, starting it lets say
sixty five through the end of your life, so over
we focused on today is the defined benefit part of the retirement market and, in particular, corporate pension plans,
How many Americans, roughly covered today by defined benefit contribution, defined benefit plants? A lot less
in the past and we think about it between the public
sector and the private sector on the public,
Hector Side coverage,
defined benefit plans is still quite large when you think about public sector employment, teachers
fire fighters police officers, a lot of them are union based employees and that define benefit plan is covered in protest
It is part of their collective bargaining. Agreements on the corporate saw
we have seen a decline in define benefit coverage. Just
more and more employers have what we call
the planned, in other words when a new employee joins the company, they know
are covered by the db plan to define benefit plan their covered by the defined contribution plan. We ve also
in some companies, completely what we call freeze their plan where, even if you still work for the company, you're no longer occurring benefits in thy db plan, so
time in the corporate space. The percentage of employees covered by a db plan has decline as more more now find that, for one k, defined contribution
There really mean retirement vehicle. Ok, see you
they put out report on pensions titled. It should be different this time. What do you mean by that
We do a lot of work on the corporate db space every year. We do and annual analysis where we really take a look at what has changed in the corporate db space, how
funded levels changed. How, as acid
location changed what our companies thinking about in terms of contribution policy and so forth.
And so when we did our analysis based on the two thousand seventeen data. There were some good news, and the Good NEWS was that for the first time since two thousand thirteen corporate db plans
areas? The Euro year increase and funded status.
The reason why we say it should be different. This time is because, when we look to prior periods were funded status had risen, such as two thousand thirteen.
Or when we look at prior periods, when the system was over funded, for example, two thousand seven in summer,
didn't, really shift their investment policy as funded status rises as plans are better funded. Many companies employ
what's known as a glide path strategy, we're going to change our acid allocation has funded status, improves basically to
guess more on matching assets and liabilities in some of those
higher periods. We haven't seen plans shift their acid allocation. The reason we say it should be different. This time is because,
for a variety of reasons, plans will actually now think about better ass. It lie bill, any matching which is basically saying my liabilities have certain characteristics and in the corporate pension space those characteristics are very bond like so, if I,
I find it ass it to match that bonds are gonna, be the mess Matt and that would imply reducing equity exposure and increasing fixed income. We're Augustine
fixed income space where an environment where the feds, starting to re short term rates,
on winding cutie and urban, some signs of inflation, maybe
not the best time to invest in fixed income. But why do you think corporate pensions can be shifting at equities in into fixed income right now? There's two reasons that we point to. One is the reality that, when we think about the corporate define Bennett
landscape. A lot has really changed over the past ten to fifteen years. Many plans are
Closed in frozen so they're not occurring new benefits, the reg
Tori environment has become much stricter in a number of factors. They are the most recent one that I'd say: it's been really impacting
and behaviour has been increases to the
the that are charged by the pension benefits guarantee Corporation, which is the cause I go
mental unsure of these plans. So you
a number of factors that are sort of guiding plans to say we should be
increasing our fixed income allocation, because it's a better
for a liabilities. In many respects, this is not about investing decision.
About a risk management decision making sure that the funded status days say daddy, say steady exactly to what about
but pension plans do envision, they'll make a similar asset allocation shift like in forecasting for the corporate pension plans, urges the fact that there still open change the calculus. Yes,
do not believe that public pension plans will follow the corporate pension plans and making a similar ass allocation shifts in a variety of reasons. One as you point
many public plans are still open and a growing you benefits of a very long time horizon their liabilities are still growing from new better,
rules the second
to think about is a lot of those factors that are guiding corporate plans to de risk,
for a regulations higher pvc premiums changes in gap financially.
forty standards, none of that applies to public debate.
And so they don't operate under the same constraints, that many corporate db plans to
as we think about over the past number of years as corporate play
have gone down this de risking path. We haven't seen public plans follow suit and we don't think they will. Let's take a step back interests
Think about the broader landscape, hear talk about the history of
or pensions and the United States after World war. Two certainly
In a post world war, two environment, we saw a real rise in defined benefit pension plans in the corporate space.
And some of that was driven by tax. If you think about in a post world war, two euro tax rates
hi, so offering a defined
if it plan in making that contribution in getting that tax direction, was attractive to
cooperation so that help them provide more.
Be benefits further employees. You also
First world war, two environment had at sometimes
each control so limited? The ability of companies too
salary, so increasing pensioner, offering pension was another way to provide a total,
You also had a number of right g coming back from the war, and so as they were going to work in a union membership increased in this country. A defined benefit plan
often part that union contract. So it really.
this kind of help increase the db coverage during a period of time so what's lead,
the decline in corporate plans over the past couple of decades
with many things, there's a number of factors and one would be a reality that the regulatory environment and the financial reporting environment has become much stricter. We talk about the higher pvc premiums that companies have to pay. That's increase the cost of the plan
not the benefit, but the cost of actually having the plan, and that's help to give an incentive
some companies to say this- is to come,
when I can offer this to employees anymore, or we may actually try to shrink our liability. So I would say number one: is a stricter regulatory environment, backup for two.
people you see, you explained very quickly, but
the government entity that backs up the pension plans in the event that the company, what company goes bankrupt.
the peoples you see, the pension benefit guarantee Corporation was created out of the arrest of rules in the nineteen seventies.
It's really the insurer of these plans and the way their funded is primarily from premiums that they charge companies the sponsoring companies, so they
like premiums from companies. If a company goes bankrupt there,
action plan is not fully funded. It gets transferred to the
did you see under certain conditions and the pages
takes over those assets, they pay the benefits in some respect too
please, that is not always a hundred percent guaranteed, but it's a way to kind of backstop or companies where their pension goes bust. You
loaded to the FED rising rate. But we had a long period of low interest rates. Talk about the fact that that
sustained period of low interest rates?
on funding for the pensions the lower
straight environment has really been the biggest factor impacting plans having them having a low funded status. If you look at the disks,
the rate that plans used value their liabilities since
the turn of the century, that rate has declined about three hundred fifty basis points, so you think about it,
liabilities that have very long duration in some cases of ten to fifteen years, while for the disks,
to come down by that. Much because of low interest rates, that, by itself hasn't
for some of these plans, pension liabilities around forty to fifty percent, so the low interest rate environment has really raise the cost of these plans. For a lot of companies and as really held those funded levels down, ok
so put in context globally. The moon
the. U S. Corporate plans are making now and will, like
continue to make do they allow
with what you're, seeing from pension systems around the rest of the world. Certainly when we look at Europe, they have been farther ahead in terms of de risking their pensions verses. What we ve done here in the United States. So in many ways. Yes, the: U S is just sort of catching up over the last couple of years, two trends,
we ve seen in other developed markets in particular in Europe.
It all, seems very interesting for corporate pension plans. What about our other
Did you show investing clients like insurance companies down
foundation? Sovereign wealth funds?
they care about these acid allocation shifts that you foresee by the? U S corporate space. I think the
His reason why those investors would want to care about it is because, as corporate db plans go down this de risking path moving out
equities or other return seeking assets and going
Two more long duration, fixed income, which is going to be the best match for their liabilities. What does that mean for
fixed income markets. We ve done some work that wouldn't
He, then, when you look at the three trillion dollars of assets in the? U S: corporate db plan space today about sex
four billion dollars could be moved in a long duration fixing come over the next couple of years, so
you gotta? Have this constant bid at the long end of the corporate credit curve by corporate db plan?
so what does that mean in terms of the ability of long term rates to rise? And what does that mean for the ability of credits?
to widen out as an
social investor? I'm gonna have to take that into account when I think about my investments in that space, so that part of
been holding down the yields in along space boss,
Treasury market in the corporate market will? Certainly, I think, corporate db plans in the? U S have contributed to that. They are served natural buyers at the long and in many ways there, agnostic as to the level of rights, their funded status goes up. They're gonna buy long duration, fixed income, almost zero
active or what that rate is that, because it's the best mass for their liabilities. I think
Stand that to what we just talked about in terms of Europe's going through this
situation aging demographic, a lot of the Marquis risking their just a lot
natural buyers at the long and giving the
duration of a lot of these pension systems around the world. Ok,
moving from the higher demand for investment, great fixed income to the other, piecemeal, the rotation of equity is what does that mean?
people reducing equity exposure of next few years in the scale of hundreds of billions of dollars will that have an adverse impact on equity markets or will be bound by new money. We don't
it's gonna have an impact on the equity market for a variety of reasons. Number one corporate gb play,
have already been reducing equities over the last ten to fifteen year, so we ve already seen them be
good evening equities. Yet the equity markets around the world have been able to reach new highs recently number two
cause they been reducing. Equities corporate tv plans don't hold as much equities as they did in the past, so their footprint in terms of what they control,
The global equity market is not as large as it used to be. The other factor, I
as we don't expect. These shifts to happen overnight,
that we seek out of equities over the last five to ten years. Having gradual as plans again, their funded status goes up. They take a little bit of equities off the table, they put more and a fixed income, so
a gradual process and even for peace.
and that are completely closed and frozen even
that may be overfunded. He
I really don't see these allocations going to zero even further, most heavily de risk plans there.
Still be an allocation to what are referred to as return seeking assets and public equities will play a major role in that.
MIKE one other big thing: that's happened when the corporate landscape in the? U S, land,
briefly is the Congress passed. They major tax reform legislation and which dramatically lower rates, cleaned up some loopholes and shifted burdens round his at having an impact on the way people think about pensions.
slowly so in the corporate defined benefit space, when companies make
contribution to their plan under certain conditions. It's a tax deductible event. So, when you think about
what companies are legally required to put in their plan. The actual
is do their analysis every year, and it's really not one number. It's arrange there's a minimum legal requirement, as is the minimum out you have to put in and that's the floor,
and then the ceiling is the maximum that you can put in and get a tax deduction at the very high number. So there's a range and in the past
I would say if you talk to accompany CFO and said wild given that range, what your contribution strategy? How do you think about that?
pretended to be very simple. Whatever the minimum is. Cash is king. We use cash for other purpose
is by backs dividends, cap and so forth. So we
we try to put him what were legally required to well
For a variety of reasons and one of the main corporate tax reform, the ECB
like so making a voluntary contribution is alot greater because I can still- and this point make it-
tribulation and get it out of thirty five percent tax rate versus the twenty
It's gonna be in the future, even though those tax rates have already changed the way it works
the pension landscape. Is you can make their contribution, update and happy
after the end of your fiscal year and still towards the previous year,
I've seen a lot of companies. Making voluntary contributions is a lot of examples out. There are companies like you, PS, Lockheed Martin, have made
multi billion dollar voluntary contributions and they cite a corporate tax rates.
Was one of those reasons, the other aspect
tax reform is the repaid
Nation issue so
any companies. Many! U S. Multinationals previously had a lot of cash overseas, but it was very
an economical under the previous tax regime to bring that back to the. U S.
So when they were looking to do by backs are cap actions, they couldn't bring their cash back. What did they do? They issue bonds, even though
a lot of cash on their balance sheet. They couldn't really use it. They couldn't breathe
get back to fund their pension either they couldn't bring it back.
Anything they can always bring it back, but the cost of the tax there try behind. So the
act of lowering the corporate tax rate
leaving a little bit of room for corporations
on their pension is that companies have a once in a lifetime chance to get the higher rate to ducked. So they can.
That contribution, and maybe some other cash overseas is how they're going to fund it.
The other side of it is. What are we thinking about in terms of de risking it's gonna be meaning plans are looking to increase their fixed income allocations are given by more bonds, but a farmer? U S mouth,
national now I have greater access to my foreign cash. Maybe only
It has many bonds anymore. So this is
actually what I call the messy hand off funded
this rise is maybe because interest rates rise in these contribution activity continues. Plans move up their lips.
They say: ok, now, I'm gonna buy more bonds, but just at that moment, company stop
as many bonds at the long and because they ve issued a lot the last few years, as well as the fact that foreign cash is more accessible and it becomes a portfolio construe
an issue which is a lot harder to construct that portfolio to hedge their liability. So you ve got a lot.
demand coming in during this period and perhaps a little weakening of supply. That's exactly what
So when you look around the world,
actually, the. U S, system is a fragmented. Why you ve got the corporate play
we have talked about that are sort of going away. You ve got the four.
On K which is around, but sometimes key
gay and misunderstood by the consumer or the person, and then you ve got these big public plans.
Which work well oftentimes for them
and a fisheries, but lead to a lot of budget shortfalls in financial engineering at state level, sometimes when,
look around the world their places where the system is a little more seem less or more coherent. Well, I think we all too often
Get a country like Australia with a super fund as something worried, Sir
the problem of coverage, so making sure that everyone has a pension. You still have
fashionable management, and I think to your point you. How does it work, though?
what is basically a mandatory DC programme, where you're gonna contribute into the plan that set by law. It still subject,
professional management. So you saw for that.
problem that many individuals in this country are covered by
Nothing? You just laid out this sort of patchwork of retirement systems, corporate db, public diesel security, but
still have a lot of people who are covered by anything, and so we talk
some states stepping into try to mandate this, but that's all
cumbersome as well, because what? If I'm an employer- and I have employees in different states-
no, I can't make that mesh with our warm a person, and I move and your person and you move. So I think the superannuated system is something that many people look at and say. Maybe
so we're gonna be out. One day I mean maybe that solves for this some sort of national system. That's mandatory nature, when we talk by the decline of pensions
three touchy politically. Sometimes people get very upset about the fact that the system that you talked about those put in place after World WAR Ii,
who's going away
there's a lot of reasons. The job market
but very different than it did after one or two at ease
playing out will, I think, we're
continue to go more towards what I would call a self directed retirement model we ve already outlined than in the corporate db space. A lot of these plans are closed and frozen. Many people are not
be covered by defined benefit plan anymore when they begin employment out of college or graduate school or whatever. So many them are only gonna be able to rely on a defined contribution plan that they participate in and then, of course, of security
I think part of the issue here is that, for everybody is really up to individual
to understand what their retirement needs are. Gonna be and then make
that their saving properly there investing properly there rebalancing properly the days of just a?
for company. I get that pension and when I retire, I drawn my pension. I draw myself. Security now have to worry about it. Those days are over for a lot of individuals. Long gone, haven't
blundering the workforce today, right now for more
to them. The option might be defined contribution plan for one k, hopefully with an employer
of some sort, nazi their tax advantages to that, but does that landscape shift as
new companies come in with more consultants rather than employees like one of the biggest
she's in the retirement system. Today,
the reality that had a lot of employees are not covered by any pension plan. We ve talked about the decline,
have defined benefit coverage, but even in defined
contribution. A lot of smaller employers dont.
for any sort of retirement programme for their employees part time. Employees may not be covered so that
Actually, the lack of coverage for individuals is one of the big hurdles to retirement where they may not work for a company that even worse
any programme at all
one of the reasons. Why were starting to see some of the states step in and say we're gonna mandate that you offer some type of retirement programme because lack
the ability for some employers to have access to a retirement vehicle is one of the biggest challenges in retirement today, so
what does it all mean for Americans and retirement for personal financial perspective, as Americans have to take
more control of their own retirement. Our people
What to do that? Are there the right vehicles to do it? Well, I think it comes
to everyone needs to be more educated about finances and retirement. What their needs are, because, again
it's gonna, be more of a self directed world. I would also say that it's the three initials what I would uses abs always be saving so for a lot of employees or younger people were coming into the workforce and they may
student loans they're trying to buy house it's easy to come.
Forget to see for retirement, but the reality is for many of them. It's gonna be up to them to do that. Obviously, if there
Where does offer a defined contribution programme that has an employer employee match being able
the advantage of that that's free money, that's on the table, so everyone I mean just has to be smarter about the reality that it's gonna be falling on a lot of individuals in terms of saving.
retirement investing the money themselves and then
I, how long they're gonna have to use that money and retirement in the way,
the financial crisis. I see a lot of people are very sceptical about public equity markets in a lot of them got burned and we saw big move
dad and holding on cash and savings rate actually went up, but a lot of people are investing. Do we feel it
it's beginning to change now. Do we see any evidence of that? I think you're right
for a lot of especially younger people, who are neither the workforce but still have that remembrance of the financial crisis. There may be a hesitancy to kind of think about it:
ass. A class is like equities. I think that
is why, if we think about you know what a fine contribution programme for a lot of individuals, the best answer is gonna, be a target they fund there's been a lot of academic studies that show that returns and defined benefit plans. Outpace those defined contribution plans and part of that is
cause individuals tender go in and
different asset classes, they tend to chase performance, they may not rebounds properly. So I think your point
for somebody who says I'm not really comfortable with that, let me go into a targeted fund where there's a professional money manager who is doing that asset allocation, whose changing that allocation over time as your factors change in particular as you age and has also rebalancing properly. So it takes that emotion out of it for someone
maybe not comfortable with different asset classes. In those funds operate,
more or less the way a defined benefit contribution would have worked in the past.
on an individual level,
not an individual level, another creating that acid allocation for you and that their changing it for you, based on when you're gonna retire. Of course, the big difference
is. There is no guarantee that your
live your money that was one of the benefits of the defined benefit system, was the longevity insurance you're going
at that monthly check forever. What
You'll have to be eighty years old or a hundred twenty years old, with a target date for
it's a pool of money and when your retirement age, you have that pool, but there's no.
Aren't you that you're not gonna live that money? So again, it comes back to the onus is on individuals to really understand how to invest their money, how to say that money and how to draw down that money retirement another
vehicle. Those popular with individuals over time was the annuity. Do we see
staying stronger coming back, or is that in favour today? It's interesting because there is actually an intersection of the Inuits. He now in the defined benefit space. You see a lot of company saying we
If somebody in our plan, we basically o them an annuity right, that's what a pension is. We're gonna give your monthly check for the rest of your life, so we
certainly see companies going to insurance companies.
saying we're. Gonna buy an annuity for participants and that's a wave
The kind of move them out of our planning it after under the costs of those people
he premiums? Another cloth are involved with it. So we see a lot of activity on the corporate dd side of come
is by annuities for their participants as await and move them out of the plan on the individual side, I think that's gonna, be an airy were, is a potential where some into
This may say: that's gonna, be mine, you, Sir Retirement vehicle, but obviously a lot of those are cumbersome products. They may not be well understood by individuals, so I think it's too
determined as to whether annuities on the individual level player all going far in big
corporations once the frozen their plans and there's no new money coming in
comes a little bit non strategic to run that plan. Do we see them outsourcing the management of those plants? Absolutely- and I think to your point when everybody was covered by the plan
got over the floor and you'd see everybody working. They were all occurring rights to the benefit. It was part
company of a sea of those on the plan, the treasure and now they are point no one's on the plan, and that's why you often hear this referred to as a legacy liability and no one hears earning it. It really just
for liability that were built up in the past and from a resources,
active a lotta.
it will say while yet important, but I don't want to devote my treasure staff for somebody to this
hire someone off the kind of managing we're not getting out of the plan. We're not giving up our fiduciary responsibility, but we'd rather
Have data resources on this we'd rather outsource it to another firms? I think has definitely been part of the reason why outsourcing has picked up in the last number of years, alright MIKE
for joining me today covered a lot of ground. Thank you, Jake that conclude
this episode of exchanges of Goldman Sachs Object, seaward thanks for listening, and I hope you can join Askin next time this bar
asked was recorded on April thirteenth, two thousand eighteen, the views and opinions expressed here and should not be can
rude as an offer to buy or sell any securities, and such views and opinions may differ from those of Goldman Sachs, global investment, research or other departments or divisions of Goldman Sachs and its affiliates. This information may not be current, and Goldman Sachs has no obligation to provide any updates or changes. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accurate,
or completeness of the statements or any information contained in this podcast and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice in the spot cast. In addition, the receipt of the spot cast by any listener is not to be taken as constituting the giving of investment advice by any Goldman Sachs Entity or individual to that listener, nor to constitute such person a client of any Goldman Sachs Entity
Transcript generated on 2021-10-06.