Improving retirement Global Pension Survey

The following is taken from the Ernest and Young Survey of Global Retirement Issues for 2014.

Although the financial aspects of aging and longevity have been debated for decades, the global financial crisis significantly altered the discussion. Policymakers, plan providers and retirees alike face new challenges in the post-crisis world.

The challenges provide an opening to reshape retirement policy and pension regulations. They also offer substantial business opportunities and a chance to spur innovation. Our seven findings below address these issues—all with an eye toward building a better retirement world.

1. Rebalance benefit expectations with financial resources

Expectations of generous retirement and pension benefits that don’t match financial reality, coupled with increasing customer longevity, are increasing retirement and pension fund deficits.

Providers and policymakers must use long-term vision and political discipline to drive tough but necessary pension and retirement reform, such as benefit reductions and “outsourcing” outcome responsibility.

2. Support concurrent evolution of local financial markets

Assets in many emerging market pension and retirement systems are increasing at a far greater rate than local capital markets are developing, which strains national financial systems in terms of operational risk, regulatory oversight, liquidity and infrastructure.

To maximize and balance pension outcomes, many levers in local markets will need to evolve and expand. This will require diverse experience and capabilities in the assessment, decision and implementation aspects of retirement and pension reform.

3. Accept a new level of regulation, oversight and transparency

The size of pension markets and their inherent risk to social and economic stability in the post-crisis world require higher levels of political and public scrutiny, regulation and transparency.

This comes with a cost. Providers must ensure their retirement solutions align across multiple jurisdictions and regulations while still supporting sustainable delivery of better retirement outcomes.

4. Increase focus on operational excellence

A holistic approach toward operational excellence (encompassing cost analysis, service delivery and risk management) is needed to drive meaningful reform and help industrialize the retirement and pension sector.

Industrialization has successfully transformed other mass-transaction markets, such as banking and securities processing, and the retirement and pension industry has an opportunity to leverage the experience and infrastructure of those markets.

5. Recalibrate investment functions and investment management

The post-crisis capital market is forcing retirement and pension providers to reevaluate their investment strategies, asset allocation policies and operating models.

Future retirement solutions need to align with the increasing size of pension and retirement assets. Robust systems and predictable outcomes are crucial to restoring public confidence in these solutions.

6. Find simplicity in complex systems

In most markets, pension and retirement systems are overly complicated. For beneficiaries, this complexity reduces confidence and engagement.

Few pension systems actively manage this dimension. Simplifying communication, product selection and operations can lead to increased customer confidence, buy-in and engagement.

7. Connect and become customer-centric

Policymakers aspire to increase voluntary retirement savings, but this is possible only when providers understand their customers’ behavior and needs.

Social media and other digital solutions are vital tools to building effective interaction with stakeholders. In effect, policymakers and providers face the same risks and opportunities that the banking industry experienced a decade ago when it began handing information, and therefore power, to the customer.

The report, highlights opportunities for reform. In the future, there needs to be an increased focus on the operational excellence of global pension and retirement systems, the report says.

Retirement professionals should look to other industries, such as banking or securities' processing, for ideas on how to improve efficiency and effectiveness, the report stated.

Complex retirement systems should also be simplified for plan participants, according to the report. Systems that are overly complicated “limit system confidence, engagement and willingness to contribute voluntarily or exercise choices,” the report said.

Simplification is especially crucial for defined contribution plans where participants are required to select investment options, said Mr. McKenzie.

In the future, benefit expectations will need to be rebalanced as well. Global retirement systems are strained by “increasing longevity and expectations of generous retirement benefits vs. dwindling financial resources to safely meet those expectations” according the report. In an effort to meet future liabilities, countries have opted to raise the retirement age. However, Mr. McKenzie did note that raising the retirement age can be a “challenging” policy to sell.

Other steps to achieving retirement system reform include acceptance of a new level of regulation, supervision, governance and transparency; encouraging local financial markets to evolve “concurrently” with growth in pension assets; recalibrating investment functions and investment management; and becoming customer-centric, according to the report.