Www.mercer.ca Global Defined Contribution Themes Implications for US policy May 2008 EBRI Policy...

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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


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



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



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?


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


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


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


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


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


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)


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

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