Post on 16-Dec-2015
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Global Defined Contribution ThemesImplications for US policy
May 2008 EBRI Policy Forum
Barbara Marder, Worldwide Partner
Global Defined Contribution Consulting Leader
2Mercer (Canada) Limited
Global DC Themes“The world of retirement has changed and we live in a defined-contribution world now”* US
– Pension Protection Act
Canada– Ontario Expert Commission– Alberta/BC Investigation
Europe– Pan European developments– EFAMA Report : DC Schemes : Risks
and advantages for occupational retirement provision
United Kingdom– Regulatory push for improved DC
governance– Cessation of DC contracting by 2012– Statutory requirement to provide DC
projections annually – 2012 Personal Accounts
South Africa– Holistic review of retirement funding
and social security
China– Enterprise Annuity
Hong Kong– Proposals :
Voluntary MPF contributions Choice of MPF Trustee
Indonesia– 2008 DB funding requirements may
lead to more DC conversions
Thailand– DC legislation expected 2008/9
Australia– Tax incentives– Looking to simplify – ease of
consolidation
Chile– Realization that cost structure is
too high
* Karen Salinaro, IBM's VP of
Benefits and Compensation
3Mercer (Canada) Limited
Global ThemesThe world is flat!
Will DC schemes deliver?
Benefit adequacy concerns:– Contributions insufficient (often less than DB)
Or not even enrolling– Returns are too low:
Poor asset allocation – too conservative “switching”
– Fees are too high Focus on expenses
– Poor investment performance Insufficient focus on managers
4Mercer (Canada) Limited
Global ThemesThe world is flat!
Societal view:– DC funds transfer risks to the group least capable of managing
them
– Government has increased its attention to these issues
Retirement Services Roundtable – Cracking the Participant Code
5Mercer (Canada) Limited
Global ThemesThe world is flat!
Additional concerns:
Member engagement
Member education/financial literacy
Leakage through pre-retirement withdrawals and borrowing
Cyclical retirements
What happens at retirement?– “good bye and good luck”
Longevity risk, what’s that?
Governance – who is overseeing DC plans?
6Mercer (Canada) Limited
Global ThemesDC Investments
Desire of participants to “delegate” decision making to a third party– Trend to reduce the number of funds offered– European DC survey: Plans offer 15 investment funds on average. 75%
of plans offer a default option, used by 70% of members– UK DC survey: Median no. of funds offered in contract-based plans is
52. 85% of plans offer a default option.– Lifecycle/lifestyle/target age/target date funds are universally popular
(but, surprisingly, not in Australia) and a common default option Prediction that $920 billion will flow into these funds over the next 5 years. Prediction that 75% of all 401(k) assets will be held in target-date funds within
5 years Custom life cycle funds are gaining traction at the large end of the market
Alternatives are creeping into DC plans, usually as a “bundle”
Increasing desire of plan sponsors to delegate authority to third party
7Mercer (Canada) Limited
Global ThemesThe world is flat! Or is it?
UK/North America
Target date/ lifecycle funds– PPA (USA)– UK age-based/US target year
Rationalization of investments
Enormous focus on fees– Full disclosure
Inertia accepted as a reality
Save more tomorrow
Conventional assets, fixed asset allocation
Annuitization (UK)
Strong employer role
Australia/Hong Kong
Few options – Generally balanced/target risk
Target date/lifecycle unpopular– Disengages employees?– Inappropriate near retirement– Age is too simple a factor
Alternative assets, dynamic asset allocation, diversification (Australia)
Strong focus on communication, education
Strong influence of financial planners
Lump sum payments only (Australia)
Employer role is marginalized
In reality responses will differ due to regulatory regimes
But some global convergence is likely
8Mercer (Canada) Limited
Global ThemesLessons from Australia (most mature DC market)?
Environment is different:
Compulsory membership and contributions
Lump sum on retirement
Master trusts
Lessons?
Even if target date in place need for engagement/communication
Target date models can be improved– Why should DC schemes have “simple” investments?– More thought to be put into near retirement lifecycle offerings
Financial planning community has a strong influence
9Mercer (Canada) Limited
Global Theme - DC Communications/Member Engagement- Where does communication end and financial planning begin?- Will automation be the real answer?
Generic Communications Financial Planning
Targeted Communications:Personalized and/or
Participant segmentation
Financial EducationProvided by 3rd party
Employer-sponsoredEducation seminars
49% of workers are interested in getting
financial advice at their workplace
about saving for retirement (up 11% from
the previous year)
44% expressed interest in overall financial planning
MetLife annual ee benefits trend survey
Managed accounts
10Mercer (Canada) Limited
Global ThemesInvestment independence and fee transparency
Australia– Complete fee transparency– 2006 Choice of Fund legislation,
employees can choose any plan
Asia– Bundled and unbundled arrangements
in China, India, HK
UK– Stakeholder pensions have a legislated
“cap” on fees– FSA requirement to disclose
commission levels
Chile– “Ideal” pensions model but severe
weakness was fees
South Africa– Government is concerned at the
quantum of fees
US– Focus on fee disclosure and fee
transparency– DC “unbundling”
highest degree of cost transparency
Best in class providers for each function
– April : Financial literacy month
Canada– Insurance companies dominate,
control investment manager access– Fees primarily bundled, must be
disclosed to members– Offer externally and internally
managed funds target date funds biased towards
in-house funds
11Mercer (Canada) Limited
Global ThemesDC plan management best practices
Heightened scrutiny on plan governance/compliance– Maturing of DC market brings evolving standards and requirements– Change is happening fast– Duty to act in best interests of members
Mandated governance practices in Ireland, Netherlands
Voluntary Employer Engagement best practices released in UK, similar guidelines in Canada (CAP guidelines)
12Mercer (Canada) Limited
Global ThemesEmerging themes
What are consequences if DC (or DB) schemes do not deliver?– Increased taxes?– Government is getting more involved (UK, USA, South Africa)– Will people simply not retire? Will they all retire if returns are
really good?
Lifecycle funds– Customised lifecycle funds – not off the shelf– Phase II?
Post-retirement phase– Huge development in post-retirement options– Annuities have never been popular so what will be popular now?
Savings beyond DC