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As people in developed countries live longer lives, companies with pension plans are facing growing pension shortfalls. The Society of Actuaries estimates that the average 65 year old man today will live two years longer than it estimated 15 years ago. This has led to large differences in the amount budgeted for pension plans and the amount actually being spent. The increased longevity of these employees’ lives has caused many major companies’ balance sheets to be changed dramatically. Most United States companies use defined-contribution plans such as 401(K)s, and these leave workers on their own after retirement. These companies will not have to worry about increased life longevity when it comes to these payments.
General Motors is an example of a company whose balance sheet is being affected by increased life longevity. The funding of its U.S. pension plans fell short by $2.2 billion and caused significant pension losses that will influence earnings in future years. With interest rates as low as they currently are, the current value of the future pension payments is boosted, making these plans even more underfunded. Companies such as AT&T and Verizon have also been hit hard by life longevity assumptions since these firms show gains and losses in the year they occur, rather than over a period of years.
This is all going on while the United Kingdom is set to make large pension reforms on April 6 this year. The reform will allow retirees to choose to withdraw an ongoing amount of income from their pension fund after retirement, allowing retirees to avoid cashing in their investments and buying an annuity. It gives retirees a decision whether or not to take on extra risk or not. Where do you see the future of pension plans going? How will companies adapt to the increased life longevity?
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