The contest, which launched last year, asked entrants to devise an investment and risk-sharing strategy that would generate the highest achievable level of stable retirement income for workers, while alleviating some of the challenges facing public pension schemes. The first-place winners work in the product solutions division at Old Mutual, the
"At a time when public pensions are under severe financial pressure and their sustainability remains in question, it's clear that decisionmakers in the
"We are excited to have received a number of creative and innovative ideas that can be operationalized in the real world, including the thoughtful analysis from the winning team from Old Mutual. The important next step will be to explore with plan administrators how the model might be applied within their own systems."
In recent decades, the
The leading alternative to DB pensions, defined contribution (DC) plans, include the popular 401(k). DC plans never have an underfunding problem because future benefits are limited to what can be supported by contributions and investment returns.
But public sector unions are resistant to DC plans. They contend that employees with limited financial knowledge could make poor investment choices, which would leave them at risk for insufficient retirement income. Moreover, they say, the costs of administering and investing in a DC plan, with individual accounts for each participant, are much higher than those of a DB plan.
The Golub Center contest, which included a prize pool of
"Our contest was about coming up with smart new designs that combined the best of both worlds for public pension plans: a CDCP without the funding deficits of DB plans, but with lower operating costs and better risk management than DC plans," says
"These kinds of hybrid solutions, which are already popular in
Under a CDCP, individual employees have a personal account balance comprised of their contributions, employer matches, and the portion of collective investment returns that are allocated to their account. While benefit distributions are linked to those balances, the assets are held in a collective fund: a key feature of a CDCP is that all employer and employee contributions are invested and managed in one collective pool. Benefits depend on investment performance, and risk sharing across multiple generations of retirees and workers increases the predictability of benefit payments and reduces volatility.
Contest entrants needed to design an investment strategy, payout, and risk-sharing policy for CDCP managers to follow that would provide retirees with the highest achievable scheduled benefit subject to limits on the probability and severity of benefit shortfalls.
According to the judges, the winning team's proposal featured "a clever combination of financial engineering and intergenerational risk sharing." Their model, which allows portfolio managers to take on more risk in stock and bond selection based on the size of an intergenerational reserve fund, produces a higher average benefit for retirees than a static investment strategy.
"We are passionate about the pension fund industry and we are thrilled to have won this competition," says Kieyam Gamieldien, one of the winning team members. "Old Mutual is committed to being at the forefront of new developments aimed at addressing the short-comings of current systems around the world, and we look forward to future opportunities to shape the local and international industry and contribute to the important work that the Golub Center is doing in this area."
Gamieldien's team members included: Niraj Rijhumal, Tinashe Chatora,
The GCFP plans to honor the two teams at its annual conference on
The mission of the
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