Can Hedge Funds Help Pension Funds Meet the $400 Trillion Challenge?

A child born in 2007 can look forward to a lifespan in excess of 100 years. Although this is marvelous news for those born in this millennia, it only adds to the woes of pension fund managers struggling with monumental shortfalls, estimated to be in the range of $400 trillion worldwide. The U. S. share of that $400 trillion is a staggering $137 trillion, more than one-third of the global shortfall. This sum makes the U.S. national debt look like a rounding error.

The solvency of pension funds is predicated on investment returns, which keep pace with future retiree demands and concurrently ensure reasonable contribution requirements for new members participating in the plan.

What’s Gone Wrong?

Several factors are in play, all of which have contributed to the crisis. First, as mentioned earlier, people are living longer, which increases the total payout for the pension fund.

Second, declining birth rates, especially in developed countries, have effectively reduced the numbers for those supporting an individual retiree. The ratio of those in the workforce to those in retirement is currently 8:1. However, by 2050 the ratio is projected to be 4:1.

Third, pension funds have over-estimated their future value because long-term investment returns have fallen short of historical averages. For example, 3 to 5 percent lower for equities and 1 to 3 percent lower for bonds. Because of smaller returns, future liabilities have increased, exacerbating pension shortfalls.

Additional contributing factors include a general lack of financial literacy and a lack of access to structured pension plans—globally, 48 percent of retirees have no pension.

What Is the Solution?

Policymakers are going to have to take the lead. Increased longevity and declining birth rates are not in the purview of the hedge fund industry. Pension funds, public and private, and the Social Security Administration must grapple with these issues. The most practical approach is to increase the retirement age to reflect corresponding increases in longevity. Life expectancy has increased 3 years per decade since 1947. However, no legislation has been passed in the U. S. regarding this issue since 1983. Other possible strategies include “needs” testing and raising the maximum earnings subject to the Social Security tax.

How Hedge Funds Can Help

To state the obvious, the best thing hedge funds can do for pension fund managers is to provide them with outstanding gains. Beyond that, hedge funds, many of which are staffed with some of the best minds in the mathematics field, are uniquely positioned to consult with pension fund managers regarding vesting, retirement age and other actuarial factors that affect the solvency of the fund.

Hedge fund firms might also consider funding seminars to educate young people on matters of finance, improving children’s overall financial literacy. In short, create public/private partnerships to foster better retirement outcomes for all. Not only would this benefit the public at large, it could also help to polish the tarnished image of the hedge fund industry.

What About Jobs?

The hedge fund industry plays a vital role in the overall economy and impacts far more lives than the average individual realizes. As the industry continues to evolve and innovate, the number and variety of jobs in the industry will grow.

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