The CFA Institute and Mercer recently published a report titled An Ideal Retirement System. The in-depth research report provides a broad set of retirement design principles to be used for debate and discussion. The study was developed at the recommendation of our Future of Finance Advisory Council, a group composed of global financial industry leaders.

As CFA Institute President Paul Smith points out in the preface to the report, the principles outlined below are not to be thought of as prescriptive in all circumstances. Smith notes that “each country is at a different stage in this conversation and faces different cultural dynamics with its populace. For some readers these principles may sound very familiar, while others may consider them controversial.”

Ideal Retirement System

Overview of the 10 principles for an ideal retirement system

1. Government must set up clear objectives for the entire retirement system, including the roles of each pillar of the system, and the system should include a minimum income to minimize poverty in the elderly population.

2. Funding should be developed into a pension system for all workers with contributions by employers, employees and the self-employed, as well as for those of working age who receive replacement for incomes. This means that every worker will have a retirement account and be entitled to future benefits when he or she retires..

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3. Cost-effective and attractive default retirement plan arrangements should be offered, both before and after retirement, for those who do not wish to or do not feel educated enough on the subject to make decisions to make investment decisions about their retirement accounts.

4. The administration and investment costs of every pension fund should be disclosed, ideally with at least some competition built into the system to encourage fair pricing.

5. A retirement system needs to be flexible as individuals in a society live in various personal and financial circumstances. This flexibility includes a design taking into account that people will retire at different ages and in varying degrees across the population.

6. Benefits provided from the system during retirement should be focused on providing income, but be designed to allow capital payments or withdrawals during retirement as long as the withdrawal does not impact the overall adequacy of the account.

7. All contributions or accrued benefits at the required minimum level be immediately vested and portable. However, the retirement benefits should only be accessible under specific conditions such as retirement, death or long-term disability.

8. Governments should give tax-based support to the funded pension system in an equitable and sustainable way, which provides an incentive for voluntary savings and compensates individuals for the lack of access to their retirement savings.

9. Governance of pension plans should always be fully independent from the control of government and/or any employer.

10. A pension system should be effectively regulated by the government, including prudence-based regulation of pension plans, disclosure requirements and offer protections for pension fund participants.

See full PDF below.

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