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In this episode we cover the super-big picture from the fascinating origins of the US pension market which is barely a century old through the complexities of the current market with some 40 million Americans having no access to a retirement plan and looking into the future how official advice over so-called “low risk investments” – aka “bonds” – is insane in a world of rampant commodity price inflation and over a decade of money-printing.
Jodan is the CEO of Smart USA which is looking to provide the technology which will empower major providers to meet the new and ever-changing needs of tomorrow’s pensioners.
He also gives us a masterclass on the important question of “how we got here” along with the pressing issues of the market at present before we get on to the future.
The US in FS in general is a paradoxical combination of world-leader and far-behind – and this also obtains in their Pensions market. But what are the details behind this sweeping generalisation? What can the US learn from the world and what can the world learn from the US? Topics discussed include:
- company drinks post-covid
- Smart USA’s founding during the pandemic
- the etymology of the pretty unique name Jodan
- Jodan’s background in actuarial-ing
- US Pensions origins on the US railroads – American Express was railroad company
- tool to reduce workplace death stats by getting people to retire before they died at work
- early 1900s life expectancy @70 at most – so high ratio of decades working to decades taking a pension (and NB how much that has changed since)
- 50s/60s defined benefit plans (DB) spread more widely in corporate sector, esp unionised parts eg auto manufacturers
- CEOs found it easier to concede on pensions – unaccounted for – rather than wages – mismatched personal incentives… ie kick corporate cashflow implications down the road past their tenure
- late 90s esp around dot com bubble times a realisation of massive gaps between assets and liabilities in DB schemes
- corporations thus close lots of DB schemes
- incentivisation of DC schemes and risk transfer to the worker from the company
- ERISA act in 1974, the 401k which grew well beyond its original design intention into retirement plans for which it wasn’t designed
- roughly 5 million businesses in the US but only ~600,000 401k plans – huge coverage gap – 85-90% of companies don’t offer one
- impact of change of accounting for company pensions
- General Motors example where people could retire at 55 after as little as 20yrs service and then claim pensions for say 30yrs..
- comparison between CEOs incentives re conceding on pensions to gain short term benefits with Hans Herman Hoppe’s “Democracy the God that Failed” looking at how the short-term tenure of Prime Ministers et al skew them to short-term measures at cost of long term
- UK’s leadership in liability-driven investment and auto-enrollment, former copied and potentially potentially so in the US
- key role of legislation which tends to command bipartisan support
- the role of default strategies in the US DC market eg target-day fund
- the insanity of using historic mean-variance as a measure of risk in today’s inflationary environment – literally leads to the antithetical outcomes in periods of high inflation
- $2trn in target-day funds, DB £3-3.5trn, qualified DC market (ie 401k) $8trn, individual retirement account £9trn
- 70% of every dominated that goes into DC right now goes into target-day funds
- three large players dominate the market
- so-called “modern [aka 1950s] portfolio theory” of asset classes and the total insanity of it never being read esp the ~”this is a super-simple model that doesn’t apply in the real-world” preamble
- target-day fund generally makes sense say age of 25-50 after which individual circs significantly affect what is appropriate
- the regulation is premised on “bonds less risky than equity” but this is insane in a high inflation environment…!
- starting to see some evolution of the approach to these plans
- the longer life expectancy also implies higher equity component to match longer term inflation
- technology should be able to deliver personalisation of needs matching
- flexing the retirement date as a parameter for many people to square the circle between size of funds and matching longer-term needs]
- 2019 Secure Act
- 40 million Americans do not have access to a retirement plan
- huge push to keep people “in plan” – difference in economics
- market not currently set-up to meet these various needs
- Smart US aiming to close this technology capability gap
- Smart’s UK master trust were it to be in the US would be the 2nd/3rd largest plan record keeper
- 30,000 feet perspective vs “rubber hits the road” angles on pensions and the huge need for efficient administration no matter what is done
- PwC estimate that another $5.5trn over next decade might be hitting the market if access to pensions is broadened
- other trillion level pots that might be moving
- real chance for disruption in US pensions market from current oligopoly
- over longer periods of history the main approach to pensions has been to have children and grandchildren – this may be coming back if we move into more of a ~”Mad Max” world…
And much much more 🙂
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