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Originally Posted by GGG
Isn’t this just an actuarial problem. Pick inflation, rate or return and lifespan conservatively and there shouldn’t be issues. The historical problem of DB pensions was they relied on an ever expanding workforce to pay for the pensions rather than relying on savings today to pay for pensions of the future.
Defined contribution plans do shift risk from the public to individuals but someone planning their own retirement makes a much less informed set of assumptions than actuaries do. If you look at the city council pension it’s 30% of base pay with 1/3 paid by employees. That amount is crazy high.
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Well the actuaries might be a piece of it, but there's another issue that is going to be a problem for people and their retirement projections in general. The truth is that we've just seen a massive return from bonds over the past ~30 years that is almost surely not going to take place going forward. Interest rates went from being at historical highs to historical lows over that period and I think that impacted the returns for a lot of these pensions. They're typically fairly heavily invested in bonds because they need the surety that comes with those securities, and they had a great tailwind. It's not to suggest that they can't see some gains as the reinvestment returns going forward should increase as rates rise, but do they increase fast enough to compensate for the decline on the other side of the ledger? I'm not so sure.
I think that is a great challenge for these mandates going forward. The required return will be significant to ensure that they are properly and stably funded, but in a low rate environment that's not going to be easy. Interesting times to say the least.