Global Pension And Retirement Systems: The $500 Trillion Prize by Ernst & Young
Governments respond to demographic transformation by attempting to reform pension and retirement systems. The reform process is highly complex and demands making a huge array of choices. Few pension and retirement systems effectively educate and empower all stakeholders about the essential choices involved in retirement planning. Thus, public confidence and choice take-up are limited.
In EY’s Building a better retirement world: Insights for better outcomes in the global pensions and retirement market, we discussed the broader aspects of the pension and retirement debate and opportunities for providers to address the magnitude of policy reform by challenging key levers and assumptions. The pension and retirement world continues to shift from paternalism to customer-led decisions and choices. This distribution theme is the focus of this year’s global pension and retirement market survey.
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All stakeholders must step up to the challenge of enhancing and reforming the system of pension and retirement distribution. Many are inadequately prepared and look to governments (and customers) as likely underwriters of last resort for pension and retirement gaps.
We broadly define distribution as the expansion of product offerings by service providers, active well-informed beneficiary participation in those products, and the regulatory environment that ensures transparency, consumer protection, effective incentives and innovation throughout the entire value chain. The biggest challenge facing stakeholders will be the cultural transformation shift from a history dominated by paternalism to a customer-centric world where members and employers have far greater power — and responsibility — to make choices.
We conducted a global survey of policymakers, regulators, pension and retirement plan trustees and industry executives, focusing on the self-assessed maturity levels of their respective distribution systems. The survey sought to ascertain levels of distribution maturity on a scale of 1 (very low) to 5 (global leader).
As Figure 1 indicates, most responses were in the 3 range, which implies a reasonably high level of maturity. Yet, this self-assessed high level is in stark contrast to the limited pension system structural reform or their public approval around the globe, skeptical public confidence in retirement systems and limited distribution success of widespread participation in retirement plan choices. Opt-out and auto-enrollment are only parts of the solutions, as they work on the same premise they try to overcome: inertia, not informed decisions. Few national retirement systems effectively address the risk of unsuccessful policy reform and, most pressingly, fully understand who will pay for the financial well-being of their retirees. The default answer to the tricky who-will-pay question usually involves some form of increased government spending. A more vocal public debate about public sector financial sustainability may speed the policy reform process.
Product providers surveyed think they have articulated a long-term strategy. Yet, public confidence in retirement systems is still, broadly speaking, limited at best. Far better communication and partnership across the retirement value chain is essential to rebuild public confidence and move toward the $500 trillion goal.
Respondents agree that product providers are still difficult to deal with and offer only limited user-friendly digital interfaces and solutions. An aggressive move into the digital age will enhance client experience, vastly improve investor education and, as such, better empower members to make informed choices.
Clearly, there are many difficult challenges ahead on the long road toward ensuring financial well-being in retirement and building public confidence. The journey will entail a long, evolving process that shifts from a paternalistic model with its high levels of government guarantees and low levels of member empowerment or choice. Ultimately, retirement systems will move toward a customer-centric model where policyholders and beneficiaries make well-informed decisions about their retirement security.
“The big question is whether government is underwriting the risk of insufficient retirement savings.” – UK pension executive
- What does this mean for beneficiaries, members and customers?
- What does this mean for different structures and levels of governments and policy makers?
- What does this mean for private and public sector pension and retirement plans and social security agencies?
- What does this mean for private and public sector product providers, including wealth and asset managers, life insurers, etc.?
- What does this mean for large employers, their HR employee benefits polices and pension and retirement plans?
Seven Key findings
1: Vision, strategy and role clarity are the foundation for public confidence
Many employers and governments make pension and retirement commitments without fully appreciating the long-term financial implications. Demographic transformation, the global financial crisis and public resistance to adjustments forced a major rethink. Paternalism, inadequate governance, and a lack of focus to empower beneficiaries to make informed decisions demonstrate massive gaps in strategy. Leading policymakers and organizations are increasingly aware that they need to shift from a paternalistic perspective to a better understanding of customer needs. Overarching is the government’s role as public finance guardian, where long-term social, pension and retirement liabilities play a vital part. Current accounting and regulatory changes in the US and proposed changes across Europe will elevate this role. The upside: this group sets the parameters for the $500 trillion prize. The downside: in many countries, different levels and structures of government underwrite and are tasked with the $500 trillion challenge of ensuring that the means exist to deliver the necessary financial well-being.
Strategic clarity enables stakeholders’ confidence
All stakeholders acknowledge the long-term nature of pension, retirement and social security. Focusing on the customer or member, as well as the employer, as “contribution administration and remittance agent” uncovers tremendous insights that we define as seven key tenets (see Figure 4). These tenets are vital for delivering successful social, pension and retirement policy.
Rapid change emphasizes a long overdue necessity for a shift in culture and a comprehensive, long-term articulated vision.
More fundamental thinking
Several leading public and private sector pension and retirement providers raise the following strategic fairness and equity issues:
- Who should pay for efforts to invest, and evolve fit-for-purpose solutions?
- Who underwrites the risk of member financial well-being and retirement outcomes?
- How much do people need to address their basic needs?
- Who determines the magic number and how is it measured and monitored?
- Who measures and tracks progress?
Finding adequate answers to these difficult questions limits the debate, which limits progress.
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