Interview with: Brett Hammond, Managing Director & Chief Investment Strategist, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF)
Providing value and financial retirement security to members is upmost on pension fund investment officers’ agendas. In the current landscape however, the reality of addressing those issues is not that simple, thus many pension fund members are facing an uncertain future. With the probability of future bubbles and volatility quite high, there is a need to rethink the notion of retirement security in the 21st century, believes Brett Hammond, Managing Director & Chief Investment Strategist at TIAA-CREF. A speaker at the marcus evans US Pensions Summit 2010, taking place in Florida, April 18-20, 2010, Hammond puts forward his recommendations for asset allocation, investment management and a revision of pension funds in North America.
What are some of the challenges facing pension fund investment executives in North America, and what solutions would you recommend?
Brett Hammond: Both defined benefit (DB) and defined contribution (DC) pension funds are facing huge challenges at the moment. DB plans are facing funding issues – the combination of interest rates and risky investments have challenged funding ratios in the last few years. Many DB plans are being frozen, closed or converted; therefore many pension fund Chief Investment Officers are also dealing with the challenges surrounding legacy plans. DC plans are facing their own challenges; a lot of the reasons why they were created was to solve some of the problems of the DB plans, but they have simply shifted the risk to the individuals. The pension fund members are now being challenged with some of the same issues of volatility in investment returns, the adequacy of contribution rates, and the question of receiving a satisfactory income through retirement. These add up to a fundamental need to rethink the notion of retirement security in the 21st century.
As we see the percentage of workers covered by DB plans shrinking and the 401K plan not necessarily completely taking the place of the DB plan, we really need to think how we can ensure retirement security for millions of North Americans. We need to question whether we have sufficient plans, and if the savings and contributions are enough to ensure lifetime income. Some pension funds were focusing on finding “hot funds” with good returns in the DC area but that sometimes was at the expense of thinking how much exactly they should be saving, regardless of whether they were investing in a hot fund or not. The other big question is what you should do with the money once it has been saved. Is it adequate or not? How do you make it work for you when you are in retirement? The old rule was taking some money out every month and making it last for the rest of your life. Right now, the critical question is whether we should be considering a sur-fundamental re-thinking of the DC plan to include the notion of a guaranteed income, somewhat similar to DB plans.
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