Pension plans likely to come up short: report
Pension fund managers are rethinking the traditional way they manage money, with many conceding that they're unlikely to meet their return targets over the next five years.
It's not just stock markets failing to deliver the expected returns, defined benefit plans have also seen their liabilities soar due to falling interest rates, which are used to calculate the cost of guaranteed future benefits.
“They’ve lived through the last decade and they’ve lived through this environment of lots of volatility, low returns, interest rates going down and liabilities going up dramatically, and all of a sudden they’re saying, ‘We need to reconsider what we’re doing,’” Derek Young, president of Fidelity’s global asset allocation division told the Globe and Mail.
In the meantime, lacklustre results have put a staggering number of plans into a deficit position, leaving them short of what they would need to pay promised pensions in the future if they were forced to settle up today.
Even if pension fund managers are able to squeeze out better returns, employees are clearly going to be asked to help make up the difference.
Already feeling the sting of a 2-year wage freeeze, Ontario teachers, for instance, will soon be expected to kick in more towards their pensions as well. The Ontario Teacher's Pension Plan will be deducting an extra 1.1 per cent from teachers’ pay by 2014, the equivalent of $770 a year from a salary of $70,000.
At the same time, retirees will face 40% less inflation protection for pension benefits earned from 2010 to 2012, unless future investment returns allow for a catch-up adjustment -- which seems unlikely at the moment.
If you have one, are you being asked to contribute more towards your pension? Are benefits shrinking at the same time?
By Gordon Powers, MSN Money