Workers in most developed economies are struggling to
address the financial implications of increased longevity and a lack of
guaranteed income in retirement. Businesses and governments have long known
that financial pressures are seldom confined to a single economy in a
globalized and digitally connected world. The retirement readiness crisis
familiar in places like the U.S. and the United Kingdom is no exception,
according to new research report from Ernst & Young. As a global challenge,
the achievement of true retirement adequacy will likely require coordinated
action across borders and economies to solve for the long term.
One upshot of the Ernst & Young report is that today’s
most retirement-ready countries have done a better job of rebalancing workers’
expectations as financial realities and resources shift. This is especially
important in places where the defined contribution (DC) retirement benefit
arrangement takes hold, wherein workers adopt much or all of the longevity and
investment risk that is held by employers under more traditional defined
benefit (DB) approaches.
Only with the realization that a long-term retirement income
guarantee won’t be in place at the end of the road will workers get more
engaged in their retirement planning responsibilities, Ernst & Young says.
Retirement systems where this fact is acknowledged within relevant policy are
therefore more successful at motivating people to prepare for their own
retirement. Countries that have allowed or mandated automatic enrollment in
private-sector DC plans, for example, are better positioned to fill the gap
left by the widespread freezing and closure of DB plans.
The Ernst & Young report also cites the importance of
retirement plan service provider engagement with local financial markets. When
local financial markets are interested in and capable of responding to demand
from DC plan participants, individuals tend to have more success planning for
retirement, the research shows.
The Ernst & Young report further suggests retirement
systems perform better when they show some level of acceptance for new
regulation, supervision, governance and transparency. Participants benefit from
an increased focus on operational excellence and efficiency—especially in the
areas of investment fees and plan administration. Successful retirement systems
are encouraging the use of technology to bring more simplicity and
visualization to complex problems, according to the report. They are also
sensitive, especially at the participant-facing level, of being more connected
and customer-centric.
The Ernst & Young research contends these best practices
are present in varying degrees in different countries. The U.S., for instance,
has seen strong penetration of TDFs and other tailored investment products, and
has also seen the increasing adoption of automatic enrollment. The nation still
trails far behind a few other countries analyzed by the Ernst & Young
report, however, due to lower average contribution rates and a reluctance to
adopt more aggressive “auto-escalation” of annual participant salary deferrals.
The research goes on to argue that implementing best
practices is important for both government and business interests. Governments
will naturally benefit from greater levels of financial wellness, especially
among their oldest citizens, while solving these challenges remains a
significant business opportunity for retirement plan and investment service
providers.
Interestingly, all of the 80-plus industry executives from
across Europe, the Americas, and the Asia-Pacific region interviewed by Ernst
& Young cited a need for immediate political reform to solve pressing
challenges.
Ernst & Young suggests global progress requires
equipping individuals to make informed saving and investing decisions based on
their own unique circumstances. And because the challenge of long-term
financial decision making transcends borders, maximizing things like
predictability, service provider professionalism, public confidence and ease of
investing will be critical for global retirement readiness.
Researchers use data from the Organization for Economic
Cooperation and Development (OECD) to suggest that, among countries with
well-developed democratic economies, Australia is perhaps the best prepared
overall to provide for its citizens’ retirement income needs.
In a separate-but-related report, PIMCO argues that the
Australian retirement system is set apart by its mandate that employers must
contribute 9.25% of pay to employees’ tax-advantaged retirement accounts. This
figure rises to 12% by 2020, according to PIMCO, and is most often directed
towards a “superannuation” DC program that does a better job of managing
longevity risk than withdrawal strategies offered in the U.S. system, where
there is less consensus and support on key spending and decumulation questions.
PIMCO says the U.K. has taken note of the success of
Australia’s system. In fact, between 2012 and 2017, the U.K. is set to phase in
a requirement for employers to auto-enroll participants at a rate that will
increase to 8% of annual pay, with at least 3% contributed by the employer. The
opting-out approach seems to function more effectively in the U.K. and
Australia, PIMCO says, where many companies report that vast majorities of
members defaulted into plans do not opt out.
In contrast to the U.S., once the money is in the Australian
or U.K. systems, participants generally cannot withdraw funds until retirement
age, even in the face of economic hardship. Clearly, DC account values will
build far more swiftly in the Australian and U.K. systems, PIMCO says, given
their higher contribution rates and their firmer control of leakage. American
regulators are just beginning to study how to slow leakage from DC plans, PIMCO
adds.
The Ernst & Young report, which provides extensive
breakdowns of the retirement systems in a long list of developed nations and economies,
is here.
The PIMCO report, which focuses on asset-allocation practices across retirement
systems, is here.
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