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Global Pension Crisis: Unfunded Liabilities and How We Can Fill the Gap


Praise for Global Pension Crisis

"The global pension crisis is an increasingly important topic for business school students to understand. It will set the tone for prosperity in the U.S., Europe, Asia, and, in fact, most emerging markets in the coming years."
—Soumitra Dutta, Dean of the Samuel Curtis Johnson Graduate School of Management at Cornell University, and ex-Deputy Dean at INSEAD, France

"Often in his career on Wall Street, Rich Marin proved himself one step ahead of his peers. Now he shares that prescience with us in Global Pension Crisis. He could not have picked a better topic: the perils of underfunded liabilities, once abstract, pose an all-too-real threat to American prosperity. Marin's diagnoses are lucid, right on the mark, and timely. This is a can that can't be kicked down the road any longer."
—Charles Ruffel, Managing Partner, Kudu Advisors LLC

"Marin's highly readable discourse on worldwide pension underfunding hits the trifecta: it is informative, eye-opening, and eminently useful. "
—Stephen Keating, Cofounder, Penbridge Advisors

"Everyone who cares about the pension predicament should read this book and, more importantly, engage with its arguments. They are realistic as well as optimistic, and that is a rare combination in this field."
—Dominic Hobson, Editorial Director, myInvestor Circle

"If you are over 50, the nightmare is the prospect of outliving your savings—the pension crisis. What do we do when we're old? Rich Marin has written an important book on the topic that, uniquely, normal humans will find clear, useful, and actually readable."
—Bo Cutter, Senior Fellow and Director, Economic Policy Initiative, Roosevelt Institute

"The author's background and experience provide him with the tools to analyze and describe the pension problem with the drama that it will have in the years to come. It is time to do something now. A great book for the general public to become aware of the problem."
—Juan Bilbao Hormaeche, Chairman and CEO, Consorcio Financiero SA

"The book offers practical and insightful lessons on Wall Street finance, or more accurately, lessons in the financing of life. Yes, it also does cover well and uniquely the pension crisis."
—Harold Bierman, Jr., Harold Bierman Distinguished Professor of Management, Cornell Univerity

Richard A. Marin is a former Wall Street executive who currently serves as President and CEO of the New York Wheel project. He teaches finance and asset management at the Johnson Graduate School of Management at Cornell University, where he is a Clinical Professor of Asset Management. He is the founder of Beehive Ventures, a venture capital fund, and Ironwood Global, a distressed mortgage hedge fund.

Preface xi

Acknowledgments xiii

About the Author xv

Chapter 1 Your Worst Nightmare 1

The Family 2

The Work 9

Where Does That Leave You? 15

Chapter 2 Dimensioning the Problem 17

Calculating the Sufficiency of Savings 18

Chapter 3 You Can’t Build Your Walls High Enough 43

The Problem of Retirement Income Security 43

Generational Warfare over the “Privilege Gap” 47

Feeding the World 51

Post-Crisis Policy Adjustments 58

The Demographic Monster Stalking Us 61

Chapter 4 Money Matters 63

Enter Modern Portfolio Theory 63

The Search for Alpha 65

The Age of Derivatives 67

The Birth of Hedge Funds 72

Alpha/Beta Separation 73

The Origins of Alpha 75

Static versus Dynamic Assets and Liabilities 75

Summing Up 78

Chapter 5 Reinventing Retirement 81

Defined Benefit Plans 81

Defined Contribution Plans 82

Who’s the Client After All? 84

The Changing Landscape 85

The Perfect Storm 87

Chapter 6 Alternatives Are Not Only for the Rich and Famous 93

Pension Assets and the Move Toward Alternative Assets 93

The Great Hedge Fund Debate 95

The Institutionalization of Hedge Funds 103

Chapter 7 The Long and the Short of It . . . Trust Me 115

Alpha from Operations 116

Operational Risk 117

Securities Lending History 119

The Securities Lending Market 121

Securities Lending Flow, Process, and Mechanics 124

Ratio Lending 131

The Rehypothecation Two-Step 132

Chapter 8 Liability-Driven Alpha 137

Painting the Recent Pension Landscape 139

Risks 140

Basic LDI Guidelines 142

Chapter 9 Power Tools for Pensions 145

Pension Benefit Guaranty Corporation 146

Factors Affecting the PBGC Insurance Programs 147

Plan Terminations 149

Pension Risk Transfer 150

Synthetic Mutual Fund Notes 161

The Role for Pension Funds 165

The Yale Model (the Illiquidity Premium) versus

the All-Weather Model 167

Chapter 10 The Poverty of Nations (Apologies to Adam Smith) 175

Is There a Path to Salvation? 176

The Chilean Terrarium 179

Chapter 11 The Ultimate Solution 187

The Nation, State, Municipality, and Company 187

You as an Individual 191

Chapter 12 A Peaceful Night’s Sleep 195

What Our Family Looks Like Now 198

Concluding Thoughts 201

Works Cited 203

Index 209