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

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  

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.