I AM A SONIC BOOMER, NOT A SENIOR... In this blog, I am writing to and for those who believe that the Boomers will change what the word Senior means. I also believe that Boomers will change what retirement means in our society. The blog is also for those who are interested in what life after retirement may look like for them. In this blog, I highlight and write about issues that I believe to be important both for Seniors and working Boomers.
Tuesday, March 17, 2015
Monday, March 16, 2015
Will Switching Government Workers to Account-type Plans Save Taxpayers Money?
Will Switching Government Workers to Account-type Plans Save Taxpayers Money?
An excellent paper by Monique Morrissey published here
An excellent paper by Monique Morrissey published here
Here are some highlites from her paper for the entire article go here
Although benefit cuts, increased employee contributions, and a rebound in stock prices have improved pension fund finances, severe under funding remains a challenge in places where the problem predated the recession and was the result of lawmakers neglecting to make required contributions over many years. This is helping to sustain the idea that we can no longer afford to provide teachers, police, firefighters, and other civil servants with secure defined-benefit pensions.
Earlier would-be reformers pushed for 401(k)-style defined-contribution (DC) plans prevalent in the private sector. But disastrous results in West Virginia, Michigan, and Alaska have shifted attention to “hybrid” plans, such as cash balance plans, that combine elements of defined-benefit and defined-contribution systems. Advocates of these types of plans say they are a compromise between those who want to maintain traditional pension plans and those who push for a transition to a 401(k)-style system. However, DC and hybrid plans, which can collectively be referred to as account-type plans, fail on three important points:
- They do not help states save money. Traditional defined-benefit pensions are more efficient than DC plans and most hybrid plans due to economies of scale, risk pooling, and other factors. Moreover, changing plan type introduces transition costs. Thus, it is not surprising that states that switched to DC and hybrid plans did not save money except to the extent that they simply cut benefits or required workers to contribute more toward their retirement.
- They create more workforce management problems than they solve. For example, many cash balance plans provide the biggest benefits to job leavers, promoting high turnover in public-sector jobs, which require a high level of skill and experience.
- They increase retirement insecurity. Account-type plans introduced around the country threaten the retirement security of young and old alike. While a well-designed hybrid plan could theoretically help younger workers without undermining the retirement security of midcareer and older workers, none of the plans offered in the current political climate has done so.
However, since these plans are typically introduced alongside cuts to benefits workers have already accrued, this point is often lost on elected officials and the general public. Since cost savings have strong appeal at a time of budget austerity and cash balance plans are the hot topic in pension debates, this report will focus primarily on cash balance plans’ impact on employers and taxpayers. However, it will also consider claims that cash balance and other account-type plans improve workers’ retirement security.
Overview: Defined-benefit, defined-contribution, and hybrid plans
This section provides a brief description of four types of employer-based retirement plans discussed in this paper: traditional defined-benefit (DB) pensions, 401(k)-style defined-contribution (DC) plans, and two types of hybrid plans that combine DB and DC features (two-tier DB-DC plans and cash balance plans).
Though all four types of plan exist in the private sector, there are differences in how benefits are funded. In the private sector, participation in traditional DB pensions and cash balance plans is automatic and benefits are entirely employer-funded. Meanwhile, participation in DC plans is voluntary and employers typically contribute less than employees, usually through partial matching contributions.
In the public sector, participation in a primary retirement plan of some type is usually automatic and workers typically contribute a fixed share of salary toward their retirement benefits, though there may be additional voluntary contributions to DC plans. In recent years, public-sector workers have been responsible for roughly half the cost of new pension benefits, though there is significant variation across plans (author’s analysis of CSLGE and CRR’s Public Plans Database 2010; Munnell, Aubry, and Sanzenbacher 2015).
How workers value pensions
The overall cost-effectiveness of pooled pensions over defined-contribution plans and most hybrid plans is not seriously in dispute. But some advocates of account-type plans suggest that they may save employers money by appealing to a modern mobile workforce. In this view, final-average-salary DB pensions give older or long-career workers too many benefits and younger or more mobile workers too few, so redistributing benefits may allow employers to reduce compensation costs with no adverse effect on recruitment or retention.
However, there is little evidence that public-sector workers of any age prefer account-type plans. The suggestion that these workers place a low value on traditional DB pensions is belied by the fact that they negotiate higher employee contributions rather than simply cutting benefits in the face of budget cuts. A study by the Center for Retirement Research comparing the experiences of public employers around the country found that pensions serve to retain skilled workers who would command higher salaries in the private sector, and that workers value pension benefits even if they fund the benefits themselves (Munnell, Aubry, and Sanzenbacher 2015). Meanwhile, a study purporting to find evidence that Illinois teachers were not willing to pay much for pension benefits actually showed that the vast majority of teachers who had the chance to purchase additional benefits did so.
Conclusion
It is often assumed that traditional defined-benefit pensions are expensive and that switching to account-type plans, including cash balance plans, is a way to save state and local governments money. This is not correct. Generally, the only way to save money in the short run is to cut benefits or increase employee contributions. In the long run, benefit cuts are unlikely to save taxpayers money because public-sector workers value these benefits and are paid less than private-sector workers. Instead, cuts will likely lead to offsetting increases in other compensation or impair recruitment and retention, degrading the quality of public services.
Another criticism of traditional DB plans is that they are inflexible and benefit older workers at the expense of younger workers. However, benefit formulas and eligibility rules can be adjusted to change the timing and distribution of benefits. For example, increasing the salary averaging period will tend to reduce the back-loading of benefits, though it will also reduce benefits overall unless offset by other changes, such as an increase in the benefit multiplier. The value of benefits earned by younger and more mobile workers can be increased a number of ways, such as indexing them to inflation and shortening vesting. However, these changes will cost money at a time when most pension funds remain underfunded due to the lingering effects of the 2008 downturn. They will also increase turnover.
Plans that shift investment risk to workers are often shown as providing a steady accrual of retirement wealth, even though account balances will fluctuate, creating unpredictable and even perverse retirement incentives. Though cash balance plans with fixed interest credits do not have this effect, they often provide the biggest benefits to job leavers, promoting high turnover.
Even a cash balance plan with a fixed interest credit that equalizes the present value of benefits of younger and older workers will nevertheless result in greater retirement wealth for workers who participate when they are young, since contributions to their accounts have longer to accrue interest. In contrast, Social Security, a pay-as-you-go system tying benefits to wage-indexed lifetime earnings, provides similar retirement benefits to workers regardless of age. That younger workers have better outcomes even under such “fair” cash balance plans would not matter much if participation were universal, as in the Economic Policy Institute’s Guaranteed Retirement Account plan, because most workers would accrue benefits at different life stages (Ghilarducci 2007). But it is important to keep in mind that even a fair cash balance plan does not result in equal retirement outcomes for younger and older participants.
Employers, and by extension taxpayers, care more about minimizing compensation costs relative to productivity than whether the present value of retirement benefits is a fixed percent of pay. This includes taking into account how workers value different types of benefits and how this affects recruitment and retention.
DC plans have been a disaster in the private and public sector. In West Virginia, Michigan, and Alaska, high costs and low account balances prompted these states to abandon DC plans in favor of a traditional DB plan, a two-tier DB-DC plan, and a cash balance plan, respectively (Pension Review Board 2012). Because problems with DC plans are so apparent, advocates of account-type plans are promoting hybrid plans instead. Though these are better than stand-alone DC plans, it is too soon to tell how these plans will work. Advocates of account-type plans ignore or downplay evidence that these plans cost more, exacerbate retirement insecurity, or both. Rather than a more equitable and efficient system, some account-type plans turn retirement into a gamble while others provide the biggest benefits to job leavers, promoting high turnover. These plans, at least in their current incarnation, are oversold and poorly understood, and we risk embarking on another failed experiment.
Saturday, March 14, 2015
Recommendations from the global survey
The global survey on retirement has some recommendations for individuals and for Countries. Here are some of these:
Translate awareness of the need to save for retirement into action
Many people are aware of the need to take personal responsibility for their retirement savings, however, they are not actively planning yet. Employers and governments can help by continuing to raise awareness and through encouraging workplace benefits.
Start personal savings early and save consistently
Starting saving early – even small amounts – can help achieve better retirement outcomes and protect against unexpected life events.
Plan for the unexpected
Many people retire sooner than expected – and mainly due to illness or job loss. Having a back-up plan such as a personal emergency plan or insurance for income replacement, can help individuals weather short-term financial difficulties.
Maintain or increase incentives for individuals to save
Most people would be encouraged to save more by financial incentives such as tax incentives and employer contributions to employee savings plans.
Make saving easy
Simple, limited and “user-friendly” retirement savings products could encourage people to save more. Powerful approaches to making it easier are auto-enrollment and automatic increases, combined with default investment options that include life-cycle or target-date funds.
Embrace active aging and working longer
Most employees envision working at an older age and a gradual transition into full retirement. Governments and employers should change policies to meet this new reality. Such changes could include retraining, part-time work and other phased retirement programs.
Translate awareness of the need to save for retirement into action
Many people are aware of the need to take personal responsibility for their retirement savings, however, they are not actively planning yet. Employers and governments can help by continuing to raise awareness and through encouraging workplace benefits.
Start personal savings early and save consistently
Starting saving early – even small amounts – can help achieve better retirement outcomes and protect against unexpected life events.
Plan for the unexpected
Many people retire sooner than expected – and mainly due to illness or job loss. Having a back-up plan such as a personal emergency plan or insurance for income replacement, can help individuals weather short-term financial difficulties.
Maintain or increase incentives for individuals to save
Most people would be encouraged to save more by financial incentives such as tax incentives and employer contributions to employee savings plans.
Make saving easy
Simple, limited and “user-friendly” retirement savings products could encourage people to save more. Powerful approaches to making it easier are auto-enrollment and automatic increases, combined with default investment options that include life-cycle or target-date funds.
Embrace active aging and working longer
Most employees envision working at an older age and a gradual transition into full retirement. Governments and employers should change policies to meet this new reality. Such changes could include retraining, part-time work and other phased retirement programs.
Friday, March 13, 2015
More results from the Global Retirement Survey
Key Findings and Recommendations
The growing financial pressures on retirement systems around the world are forcing individuals and families, employers, and policymakers to change the way they think about and plan for retirement. Retirement as a concept is being rapidly redefined. As individuals accept more personal responsibility for retirement planning, we can expect to see them saving more through pensions and other long-term savings products. We can also expect to see people work beyond current retirement ages as the notion of retirement becomes more flexible, blending leisure with periods of employment. While the onus is on the individual to plan ahead, there remains a vital and essential role for governments and employers. Not only will they continue to provide significant financial support, through government retirement benefits and workplace pensions, but they will also come to provide a wide array of services to people who need to build the important life skills required to save for, and transition into, retirement. Working together, individuals, employers and governments can do a lot to “make retirement easier.” Our 2014 survey findings show that we still have more progress to make.
The economic outlook revives, but concerns about future retirement remain The survey findings illustrate a number of changes in employee sentiment as the outlook for the global economy continues to grow more positive. For instance, one-third of respondents (31%) now expect their personal finances to improve in 2014.
In last year’s survey, 25% held this view. As in 2013, people continue to hold positive aspirations for retirement, with many associating retirement with leisure (46%) and a sense of freedom (41%). Nevertheless, this is combined with a continuing widespread lack of confidence that retirement will actually deliver these benefits. One-third (34%) of employees are pessimistic about having enough money to live on in retirement, and just 19% are “very” or “extremely” confident that they will be able to fully retire with a lifestyle they consider comfortable. This confidence is especially low in Europe, with the figure in France just 6% and in Poland 4%. Furthermore, one-third are pessimistic about their ability to choose the time at which they retire, while only half (51%) are optimistic that they will be able to maintain good health in retirement.
Only one in six (18%) expect to be better off in retirement when compared to current retirees, revealing a widespread sense – particularly strong in Europe and North America – that the sort
of retirement currently being enjoyed by their grandparents or parents won’t be available to future generations. In the future, retirement will come to be defined very differently. In particular,
it will require a larger role for paid employment as the notion of retirement becomes more flexible.
There is a strong need to undertake financial planning Financial planning will be central in addressing concerns about income shortfalls and the pessimism about how and when people enter retirement. However, few people are currently preparing adequately for their retirement. Just one in six (18%) achieved a high Aegon Retirement Readiness Index score in 2014 (a score of more than 8 out of 10 based on six questions in the survey gauging retirement attitudes and planning). In contrast, over half (55%) of employees recorded a low retirement readiness score (a score of 6 or less out of 10).
Underlying these low scores is a widespread lack of retirement saving and planning. While 34% of “habitual savers” achieved a high Index score (twice the global average), 82% of “non-savers” found themselves with a low Index score. The priority must be to encourage more people to start long-term saving, and to save regularly as part of a comprehensive retirement strategy.
While nearly half (44%) of employees have a strategy, only one in eight (12%) has a written retirement strategy. Worryingly, 40% say they have no strategy at all. Another 4% replied “do not know.”
A major step-change in retirement planning, and indeed life-long financial planning, is required to help people in the event their circumstances change. Currently 61% have no back-up plan to provide them with an income in the event that they become unemployed or are unable to work for a prolonged period before their planned retirement. Given that 45% of retired respondents tell us they had to retire sooner than planned as a result of events like ill-health (34%) or losing their jobs (25%), this is a very real risk facing people, many of whom are not preparing for it.
The solution lies in making retirement planning easier Financial constraints on households continue to explain why some people are not saving enough for retirement. Only 28% of employees have enough money to invest for their retirement, while 48% said that receiving a pay raise would encourage them to save more. Faced with these financial realities, governments, employers and pension providers have a shared responsibility to help people plan for their own retirement by making the process as easy as possible and creating the right incentives to save.
One of the clearest signals governments can send to employees about the benefits of saving is through the tax system. Most countries offer some kind of tax relief to encourage long-term savings, but such support has come under pressure as governments look to balance public sector budgets.
Nonetheless such tax benefits remain important, with 32% of respondents agreeing that more generous tax breaks would encourage them to save more.
Employers have a dual role to play in providing both financial support in the form of workplace pensions and other workplace savings products, as well as services such as online retirement
planning tools or workplace financial advice. Overall, 63% of employees say that they find the prospect of being automatically enrolled into a workplace pension appealing. On average, employees envision contributing 6% of their salary, and think it reasonable for their employers to contribute 8% into an auto-enrolled retirement plan.
The financial services industry can also play a role, given that 21% of respondents say that they would save more if investment products were simpler and easier to understand.
Twenty-four percent would also like products that make it easier to track and manage their savings. Despite the demand for greater simplicity, there is still a role for the industry in offering guidance, information tools and professional financial advice. Twenty percent of respondents say that more frequent access to information about their retirement savings would encourage them to save more, while 17% would like access to professional financial advice that includes personalized recommendations. Flexibility will become the new model of retirement
Many current employees expect to have some kind of phased transition into retirement, with 29% saying they will first move to part-time work before giving up work altogether and
17% planning to move to part-time work and continue that throughout retirement. Only 32% of future retirees expect to stop work completely at retirement age. This view continues to be more common in certain European countries including Spain and France where the notion of a “cliff-edge retirement” is still supported by a small majority of employees.
Among current retirees, only 9% worked beyond their planned retirement age. But those who did, did so mostly for positive reasons as people looked to keep themselves mentally and
physically active. It is clear from the findings that employers will need to do more to support flexible retirement. Currently, only 23% allow their employees to go first into phased, part-time
retirement and only 12% offer retraining. Furthermore, 52% of employees say their employers currently do not provide enough information or support to help employees transition into retirement.
Underpinning this shift in behavior at retirement is the level of support among employees (52%) for some sort of increase in the official retirement age. However, there is a degree of reluctance to change among a large minority, with 41% of respondents saying their working lives are already long enough. Governments will have an important role to play in shifting people’s expectations by modifying official retirement ages or, in some cases, abolishing mandatory retirement ages altogether.
For the full report go here (pdf file)
The growing financial pressures on retirement systems around the world are forcing individuals and families, employers, and policymakers to change the way they think about and plan for retirement. Retirement as a concept is being rapidly redefined. As individuals accept more personal responsibility for retirement planning, we can expect to see them saving more through pensions and other long-term savings products. We can also expect to see people work beyond current retirement ages as the notion of retirement becomes more flexible, blending leisure with periods of employment. While the onus is on the individual to plan ahead, there remains a vital and essential role for governments and employers. Not only will they continue to provide significant financial support, through government retirement benefits and workplace pensions, but they will also come to provide a wide array of services to people who need to build the important life skills required to save for, and transition into, retirement. Working together, individuals, employers and governments can do a lot to “make retirement easier.” Our 2014 survey findings show that we still have more progress to make.
The economic outlook revives, but concerns about future retirement remain The survey findings illustrate a number of changes in employee sentiment as the outlook for the global economy continues to grow more positive. For instance, one-third of respondents (31%) now expect their personal finances to improve in 2014.
In last year’s survey, 25% held this view. As in 2013, people continue to hold positive aspirations for retirement, with many associating retirement with leisure (46%) and a sense of freedom (41%). Nevertheless, this is combined with a continuing widespread lack of confidence that retirement will actually deliver these benefits. One-third (34%) of employees are pessimistic about having enough money to live on in retirement, and just 19% are “very” or “extremely” confident that they will be able to fully retire with a lifestyle they consider comfortable. This confidence is especially low in Europe, with the figure in France just 6% and in Poland 4%. Furthermore, one-third are pessimistic about their ability to choose the time at which they retire, while only half (51%) are optimistic that they will be able to maintain good health in retirement.
Only one in six (18%) expect to be better off in retirement when compared to current retirees, revealing a widespread sense – particularly strong in Europe and North America – that the sort
of retirement currently being enjoyed by their grandparents or parents won’t be available to future generations. In the future, retirement will come to be defined very differently. In particular,
it will require a larger role for paid employment as the notion of retirement becomes more flexible.
There is a strong need to undertake financial planning Financial planning will be central in addressing concerns about income shortfalls and the pessimism about how and when people enter retirement. However, few people are currently preparing adequately for their retirement. Just one in six (18%) achieved a high Aegon Retirement Readiness Index score in 2014 (a score of more than 8 out of 10 based on six questions in the survey gauging retirement attitudes and planning). In contrast, over half (55%) of employees recorded a low retirement readiness score (a score of 6 or less out of 10).
Underlying these low scores is a widespread lack of retirement saving and planning. While 34% of “habitual savers” achieved a high Index score (twice the global average), 82% of “non-savers” found themselves with a low Index score. The priority must be to encourage more people to start long-term saving, and to save regularly as part of a comprehensive retirement strategy.
While nearly half (44%) of employees have a strategy, only one in eight (12%) has a written retirement strategy. Worryingly, 40% say they have no strategy at all. Another 4% replied “do not know.”
A major step-change in retirement planning, and indeed life-long financial planning, is required to help people in the event their circumstances change. Currently 61% have no back-up plan to provide them with an income in the event that they become unemployed or are unable to work for a prolonged period before their planned retirement. Given that 45% of retired respondents tell us they had to retire sooner than planned as a result of events like ill-health (34%) or losing their jobs (25%), this is a very real risk facing people, many of whom are not preparing for it.
The solution lies in making retirement planning easier Financial constraints on households continue to explain why some people are not saving enough for retirement. Only 28% of employees have enough money to invest for their retirement, while 48% said that receiving a pay raise would encourage them to save more. Faced with these financial realities, governments, employers and pension providers have a shared responsibility to help people plan for their own retirement by making the process as easy as possible and creating the right incentives to save.
One of the clearest signals governments can send to employees about the benefits of saving is through the tax system. Most countries offer some kind of tax relief to encourage long-term savings, but such support has come under pressure as governments look to balance public sector budgets.
Nonetheless such tax benefits remain important, with 32% of respondents agreeing that more generous tax breaks would encourage them to save more.
Employers have a dual role to play in providing both financial support in the form of workplace pensions and other workplace savings products, as well as services such as online retirement
planning tools or workplace financial advice. Overall, 63% of employees say that they find the prospect of being automatically enrolled into a workplace pension appealing. On average, employees envision contributing 6% of their salary, and think it reasonable for their employers to contribute 8% into an auto-enrolled retirement plan.
The financial services industry can also play a role, given that 21% of respondents say that they would save more if investment products were simpler and easier to understand.
Twenty-four percent would also like products that make it easier to track and manage their savings. Despite the demand for greater simplicity, there is still a role for the industry in offering guidance, information tools and professional financial advice. Twenty percent of respondents say that more frequent access to information about their retirement savings would encourage them to save more, while 17% would like access to professional financial advice that includes personalized recommendations. Flexibility will become the new model of retirement
Many current employees expect to have some kind of phased transition into retirement, with 29% saying they will first move to part-time work before giving up work altogether and
17% planning to move to part-time work and continue that throughout retirement. Only 32% of future retirees expect to stop work completely at retirement age. This view continues to be more common in certain European countries including Spain and France where the notion of a “cliff-edge retirement” is still supported by a small majority of employees.
Among current retirees, only 9% worked beyond their planned retirement age. But those who did, did so mostly for positive reasons as people looked to keep themselves mentally and
physically active. It is clear from the findings that employers will need to do more to support flexible retirement. Currently, only 23% allow their employees to go first into phased, part-time
retirement and only 12% offer retraining. Furthermore, 52% of employees say their employers currently do not provide enough information or support to help employees transition into retirement.
Underpinning this shift in behavior at retirement is the level of support among employees (52%) for some sort of increase in the official retirement age. However, there is a degree of reluctance to change among a large minority, with 41% of respondents saying their working lives are already long enough. Governments will have an important role to play in shifting people’s expectations by modifying official retirement ages or, in some cases, abolishing mandatory retirement ages altogether.
For the full report go here (pdf file)
Thursday, March 12, 2015
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.
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.
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.
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