In this topic you will complete the following four activities before taking up the discussion in the Modules. These activities will refresh some key concepts and provide the context for the discussion of the DGI framework for pension management.

ACTIVITY 1: Gathering Stories: Interview About Pensions & Retirement – Reflections & Expectations

Before you read and discuss rest of topics in the modules, you should interview one person who is retired or is contemplating retirement. The purpose of this activity is to help you connect with the issues and challenges of old age financial security. The conversation will provide a context for the analysis of the various topics in this eText. This conversation  activity is primarily a listening project. To understand what good listening is, read this white paper by Zenger and Folkman (2016); ‘What Good Listeners Actually Do’.

For many of us, the long-term consequences are too distant to be as salient as achieving immediate term financial goals. Therefore, the decisions that are taken about the long-term such as old age financial security are deferred. Interviewing the current generation of retired or would be retirees is intended to enable us to engage with the pension topics of this course with a greater degree of involvement and understanding. This story gathering exercise will have at least four potential benefits. One, by engaging in this experiential learning task, you will develop a more encompassing and empathetic view of the challenges faced by individuals in saving for their retirement through their working lives. This contributes to the development of professional skills important to a financial advisor or financial services provider. Second, it will also benefit you personally as you will develop a better appreciation of the challenges to old age financial security. Third,  a closer engagement in the course of completing this story gathering exercise will help you in your future responsibilities as a finance professional  to connect with the challenges individuals and societies face in providing for their pensions. Fourth, the discussion will contribute to stronger connections between finance and society. We are hopeful that the interviews will shift the focus of financial decisions from arbitrage opportunities in transactions to value additions in investment decisions that contribute to greater retirement security

With rising longevity of financing old age has become a critical concern for individuals and society. However, of equal concern is that these long-term decisions are taken in a manner that distributes the costs and benefits of such decisions in a fair and equitable manner between the current generations of workers and retirees and the generations yet to be born. This is termed as the concern for intergenerational equity. If young adults continue with their attitude that financing retirement and long-term healthcare is not their priority, decisions on these important concerns will be taken such that it will shift the burden of financing current retirement costs to later generations.

The prospect of unfair sharing of the costs of retirement and long-term healthcare between generations is compounded by labor market changes that increasingly affect new entrants to the workforce today. Emerging data suggests that current entrants to the workforce are more likely to be working in jobs in what has been called the “Gig Economy,” which do not provide for workplace and retirement benefits. With an aging population,  they are also likely to be further burdened with the retirement costs of the current retirees. Lack of resources to save in the present coupled with the inability to benefit from compounding because of frequent changes in employment and a growing share of jobs in the gig economy,  translates into new and unique challenges to retirement security of recent entrants to the labour market.

This exercise of gathering stories of retirement through one-on-one interviews is aimed at establishing this connection and the engagement with retirement issues and challenges. Previous experiences of readers of this e-text that have completed this exercise suggest that the gathering of stories have enabled them as upcoming finance professionals, to engage with the issues of the day as an insider and no longer remain an outsider looking in. Therefore, this exercise should be undertaken with commitment and involvement.

This exercise will be completed in two steps^[1].  An example of the guidance given to students as per our university ethics board’s protocol is in the appendix to this chapter.

Step 1:

Interview one individual whom  you do not know, or, have a personal or professional relationship with; and is either retired or contemplating retirement.

In addition to the reading  by Zenger and Folkman (2016), cited above, you may draw inspiration for this assignment by visiting Story Corps, whose mission is to build connections by sharing each other’s stories. It also has tips on how to engage other people in a conversation.

Sample Questions to begin with:

1. What does retirement mean to you?
2. Please describe the circumstances around when and how you will retire?
3. What are your challenges in implementing your plans to retirement?

Questions/comments to make to keep the conversation going:

1. Please tell me what you mean when you use that word.
2. Please explain that comment/observation you made for me
3. Can you give an example to illustrate that comment/observation you made?

Caution: You should never offer your opinion about the interviewees reflections and under no circumstances any investment related advice should be volunteered.  As in Canada, most countries have  regulations and laws that only permit licensed finance professionals to offer financial advice.

 IMPORTANT

(See Appendix A Suggested Rubric included at the end of this topic)

Step 2:

Reflect on the story that you gathered. What are your observations after having completed the interview? Also assess how the stories you gathered reflect the Canadian experience. To be able to compare with the Canadian experience, a report  based on surveys of nearly a thousand Canadians was recently released (Baldwin, 2017).  This report raises several important questions about the design, governance and investment decisions of pension plans.  Study the report, The Pensions Canadians Want:  The Results of a National Survey, and decide how the stories you gathered reflect the broader Canadian experience.

Completing these two steps sets the stage for you to begin to think how to manage pension finance in original and innovative ways.

ACTIVITY 2: Review the Latest Global Report on Pension Assets

The Global Report on Pension  Assets is an annual document that presents a cross country global perspective on pension assets.  It will be useful to browse through this report to provide a context for the DGI framework of pension management that we discuss in the next three modules.

After a close read of the Global Report on Pension Assets, answer the following questions:

1. What is the size and distribution of the assets attributed to pensions and retirement financing?
2. In terms of asset allocation what is the fastest growing asset class. Explain why?
3. What explains the differences in pension asset allocations in the prominent economies of the world?
4. Which is the share of defined contribution and defined benefit plans in the pensions systems of the different countries? What explains these choices of pension design?

ACTIVITY 3: Time Value of Money & Pensions

Time  Value of Money, a topic that you covered in your introductory finance course,  is a very useful organizing framework that is central to financial decisions. It is important we understand how it can be applied to standard retirement decisions and what are the the data challenges and implicit assumptions that underpin such decisions. This will serve as a benchmark to compare real life decisions on retirement and old age financial security.

These questions are adapted from Brealey et al. (2016) Fundamentals of Corporate Finance 6th Ed. You can find similar questions in any introductory text in finance used in a Finance 101 course.

In these problem statements there is no information about the assumptions or source of the numerical values. As you work through these questions ask what do you need to know to be able to arrive at these numerical values?  What are the assumptions you make?  What is the basis of these assumptions.

A complete answer for the pension course will require not only a numerical solution but also a comprehensive assessment of the assumptions underpinning the number values and the theoretical or logical basis of those assumptions. For example, in your computations you could comment on the validity of the numbers based on your understanding of monetary policy; inflation trends; history of returns and volatility of stock market returns; longevity trend tables, etc.

Problem Statements:

1. Aarti would like to retire in 25 years. Her goal is an annual real income of $48,000, paid at the end of each month of their expected 20-year retirement and to leave behind $250,000, in real dollars, to her son. Her son will begin his university in 5 years and her intention is to support him for 4 years by paying his university fees of $10,000 real dollars per year, due at the start of each year. She has a mortgage balance of $250,000. She has a 25-year Canadian mortgage with an annual interest rate of 4.8%. She expects to live in her house for the rest of her retirement. The house value is likely to appreciate 3% annually, same as the inflation rate. The nominal rate of return on savings and investments is around 6%. Based on the above description calculate the monthly savings rate. Clearly state any assumptions included in the calculations.
2. Richard upon retirement after 30 years of employment has a savings of $180,000. His house  is fully paid off. His workplace pension is a defined benefit plan. His accrued benefits are 1.75% of the best average 5 years of his annual salary (calculated in his case to be $72500 per annum) multiplied by the number of years of service up to a maximum of 35 years. His house will be a passing away gift to his son. He has accumulated savings of $180,000, conservatively invested. He is a widower; his wife having passed away 3 years ago. His lifestyle choices are relatively modest. However, he will like to travel if he could. He will like to plan his retirement with conservative assumptions about financial returns and inflation. What advice do you have for Mr. Richard? Advise and prepare a financial plan for him based on his choices and expectations into his retirement.
3. Jeff’s plan is to retire in 35 years and want to accumulate enough by then to have $36,000 per year for 20 years. What funds must be available to finance this retirement? What can be assumed about the market rate of return? What must Jeff save annually between now and the time of retirement? What should be his assumptions about inflation; longevity and how will these impact his decisions?

You can use resources from the following websites to formulate your assumptions :

Service Canada Information on OAS & CPP

Statistics Canada

REFLECTION QUESTIONS:

1. What are the assumptions implicit in your calculations?
2. How do you arrive at the data?
3. What do your calculations and analysis of assumptions say about pension design?

ACTIVITY 4: Towards Better Capitalism

This is the final recommended activity.  In this round table,  prominent CEOs; investment bankers and economists discuss the challenges to investing with a long term vision. This is an important concern for funded pension plans.   Sustainable pension plans cannot be based with sole reliance on arbitrage opportunities and transaction based approach to asset management. The round table is a useful introduction to long term asset management.

1. View the discussion in the video above.
2. What is meant by fiduciary duty? Why does focusing on long term more closely align with fiduciary responsibility; according to the head of the Washington State Investment Board.
3. Profits as a percentage of GDP is going up and Wages as percentage of GDP is going down. What does it mean for long term investment?
4. Stiglitz asserts that there is evidence to show that focusing on the long-term makes the economy more efficient. Mark of E&Y says that the real value of the company is in its intangibles and not quarterly earnings. So why do asset managers continue to focus on the short-term earnings data in their decisions to buy or sell a company?
5. Mark of E&Y makes reference to Data Analytics and how it is enabling his firm to track intangibles within his firm (13:17). How can blockchains in asset management help in shifting the emphasis from the period of reporting to what you report as an indicator financial performance.
6. How does shifting the emphasis to what you report (intangibles; strategy and other non-financial metrics) compare with a focus on short term earnings as a prerequisite to long term focus as suggested by Carlos the Renault CEO and the introduction of loyalty shares as suggested by Stiglitz?
7. Can a more enlightened interpretation of fiduciary responsibility of ensure a focus on long term and move away from financial metrics?