Old Mutual team wins US contest for retirement plan strategy

By Janice Roberts
Editor

From left to right – Back; Niraj Rijhumal, Tinashe Chatora, Coenraad Coetzer Front; Kieyam Gamieldien, Marvin Nair, Fred van der Vyver

A multi-disciplinary team from Old Mutual was crowned the winner of a Massachusetts Institute of Technology (MIT) Golub Centre for Finance and Policy (GCFP) contest for designing a collective defined contribution retirement plan strategy for public sector employees. The team will be honoured at the GCFP annual conference in September in Cambridge, Massachusetts.

Entrants were tasked 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. Kieyam Gamieldien, General Manager: Income and Guaranteed Solutions at Old Mutual, explains that the team’s solution leveraged their expertise and experience in the retirement industry to combine dynamic asset allocation strategies with the same risk sharing principles on which the Old Mutual Smoothed Bonus portfolios are based. “Given our country’s history of moving from defined benefits (DB) to defined contribution (DC) pension plans and applying the same principles in the DC space, we have the expertise and experience that could be applied in the United States of America.”

According to him, investment and longevity risk sharing are key principles used to better manage the risk associated with retirement outcomes. “These principles are integral to Old Mutual’s smoothed bonus and with-profit annuity products. The solutions employ these effective risk-sharing principles and have a proven track record of delivering good long-term real returns while significantly reducing the risk associated with retirement outcomes.” DB funds provide peace of mind to retirees by providing an income related to pre-retirement salary, but it comes at the cost of exposing employers to significant risk, says Gamieldien. “On the other hand, DC funds mitigate risk for employers but exposes retirees to the risk of insufficient retirement income. The challenge is to develop a retirement plan that manages the risk for members better than a normal DC plan, while providing reasonable retirement benefits similar to those offered in a DB plan.”

Deborah Lucas, Director of the GCFP and the Sloan Distinguished Professor of Finance at the school says, “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.” Public sector pension plans in the US are under severe financial pressure due to underfunding, estimated at a market value of $5 trillion. This underfunding represents the current value of the shortfall between pension assets relative to expected future benefit payments.

“South Africans are also facing the reality of insufficient retirement income, partly due to the pensions industry transitioning from DB to DC pension plans. This award reinforces the benefits of our offering to clients and is a great indication of the innovative culture at Old Mutual,” concludes Gamieldien.

 

 

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