The head of one of America’s largest financial product providers recently gave a provocative talk on retirement to a think tank based in New York. Roger Ferguson, president and CEO of TIAA-CREF, the largest provider of retirement and financial products to Americans in the not-for-profit sector, spoke at the Council on Foreign Relations.

CREF was founded in 1918 in New York by Andrew Carnegie, the leading industrialist and philanthropist, as the Teachers’ Insurance and Annuity Association. It catered for members of the academic, medical and cultural institutions. Initially it held mostly bonds. Then, in 1952, the College Retirement Equities Fund was added, also investing in stocks. Now it has about $900bn (€800bn) in assets under management, including mutual funds and life insurance. It has 5m individual clients overall, including 3.7m clients in institutional retirement plans. 

“I am relatively optimistic about the current market volatility,” said Ferguson. “The Federal Reserve has been very transparent about its intentions of gradually increasing interest rates. Volatility is the consequence of inconsistent data. There is some strength in the labour market but some weakness in other parts of the economy. Of course I hope that no geopolitical changes will spill over the financial markets.” 

Ferguson has considerable authority when discussing the Fed. From 1999 to 2006 he was the vice-chairman of the board of governors of the Federal Reserve system. Before joining TIAA-CREF he worked in the private sector including for Swiss Re and McKinsey.

Swiss Re recently put out a report about the long-term costs of quantitative easing and zero interest rates for pension funds, insurance companies, and savers. It estimates the foregone fixed-income returns to be $500bn in the US but Ferguson did not sound alarmed. “The better-run pension funds have a very diversified portfolio,” he said. “If the fixed income is flat, equities continue to perform well, and private equity and real estate generate very good profits.”

TIAA-CREF is the second largest real estate manager in the US. It is a good investment as an inflation hedge, with particular success in commercial real estate. Ferguson said it is premature to talk about a bubble in corporate debt. Nor does he see another big financial crisis ahead.

He is more concerned that private savings have been too low. “People must realise that they have to save more and have longer working lives,” he said. “What we can do, is to favour an evolution of the nature of products that the pension industry offers. People pay a lot of attention to the phase of asset accumulation, but not to the phase of cashing in benefits.”

“Besides, Americans often do not understand the investment options they have with 401(k) plans. They often think some of the most popular options, such as TDFs (target date funds), offer guaranteed benefits, which is not true”.

Ferguson said TIAA-CREF could be a great model for the whole of America. “With TIAA we give people a fixed annuity, which guarantees an income for life that’s fixed, and then the CREF part of our organisation provides variable annuities that have a nice inflation hedge to them.”

State and municipal pension funds’ impending crisis is a critical problem in the US, he said. “But the real challenge is how you progress from a plan that may not be sustainable to one that is sustainable,” he said. “I look to the Rhode Island reform as being a solid model because it has the best of both the DC and the DB world, but getting there was absolutely contentious.” That reform took effect in July 2012, creating a hybrid DB/DC plan, raising the retirement age and suspending cost-of-living increases. Unions sued and finally a proposed settlement was approved by a judge who called it an imperfect but fair solution. The deal – providing for cost-of-living increases and one-time stipends for retirees – would preserve about 90% of the savings. If there are no more reforms, Ferguson concluded, there will be more cases where bondholders are pitted against pension beneficiaries.