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© Copyright 2000 Rogers Media. The following article first appeared in the June 2000 edition of
BENEFITS CANADA magazine.
New world order
This extended period of low inflation is making pension asset management more challenging than
ever. And that's not the half of it.
By Dian Cohen
Pension plan sponsors and managers have their work cut out for them as never before. They've always had to
manage their plans in a way that ensures members receive their promised income upon retirement. But for the
foreseeable future, the risks to plan solvency are coming hard and fast. Let us count the ways.
A non-inflationary environment brings a great many issues with it. Obviously, low, long-term interest rates
make life more difficult because managers have to be more skilful in achieving the required returns. But an
equally important issue is the controversy over whether a low inflation/deflation scenario is an aberration
or normality.
Most money managers have cut their teeth on inflation. But there is still far too little appreciation that
rising productivity is embedded in the shift to a networked global economy, and that will keep costs low.
The failure to appreciate the new environment makes it more difficult for managers to be as decisive in
their day-to-day decisions as they were when they understood what was happening to their world.
It's probably more clear today than it was a couple of years ago, but managers now have to find other
assets to take the place of long-term government bonds. With the shifting tides of voters moving away from
big borrowing needs (prodded by capital markets that put the kibosh on them a few years ago), indebted
governments have got their acts together and have retired a lot of long-term debt.
The U.S. is buying bonds back like they're going out of style. These risk-free instruments were the bread
and butter of pension managers, but from now on they will be in short supply. What will take their place?
Instruments that carry more risk. There are lots of such vehicles in the capital markets, but they take a
great deal more investigation.
Volatile stock markets present challenges as well. Again, uncertainty is a constant companion. Until a
couple of months ago, conversation and analysis revolved around old economy and new economy stocks. Then
came the March/April pull-back of the Nasdaq and other tech-based exchanges and people changed the
definition of the old economy to the real economy.
The implication that the new economy isn't real is nothing more than the bravado of people who are afraid
of the unknown, and uncomfortable with the notion that everything they grew up with and thought they
understood is now changing.
The new economy is neither new nor unreal. The instruments that have made it possible have been the wired
technology of telecommunications, including TV and jumbo jets. Phones and planes are 100 years old, TV is
pushing 70. Figuring out how to get the returns while minimizing risk is made far more difficult for people
who look to stability and predictability, as in "such and such a company has been in business for 100 years
. . ."
In the new world, new is more powerful than any signifiers of long experience. Yet it's taken us all these
years to assimilate telegraph, phone and computers into a national network. Failure to understand the
implications of networked computers (the foundation of e-commerce) adds risk to the decision-making ability
of all the stakeholders involved in managing pension plans.
Just as a new attitude about government debt has created more risk for pension managers, so too have
changing social attitudes. Take, for example, the Ontario government's decision to allow pensioners with a
terminal illness to demand a lump-sum payout from their pension plan. Actuarial calculations of a sound
pension plan, which determine contribution rates, never anticipated this move. Conceivably, such lump-sum
demands could impact the solvency of a plan. The Ontario government is studying the implications of its
ruling, but the point is that any regulation can raise risk, and that too has to be managed.
It's small wonder that plan sponsors and money managers are moving responsibility for after-work income to
the recipients of the income. For my money, education is the key to minimizing risk--exposing people to the
techniques of wealth creation and to the possibilities just now being dreamed of that the networked world
offers.
Dian Cohen is an economics consultant with a special interest in pension issues.
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