LONDON - Defined contribution assets outside of the United States are expected to soar to $1.4 trillion by 2002, growing at nearly twice the clip of defined benefit plans, according to projections by InterSec Research Corp., London.
But overseas defined contribution systems often don't follow the U.S.-style 401(k) plan model that offers individual investment discretion.
"There's a mistrust of the American way of doing things," said Stephen Oxley, managing director at InterSec in London.
"Attitudes tend to be more paternalistic on both the government and the employer level," he added.
In a major study into growth prospects for non-U.S. defined contribution plans, InterSec officials projected the plans will expand at a 16% annual rate, compared with only 9% for defined benefit plans.
However, non-U.S. defined benefit assets still will outstrip defined contribution assets by a wide margin: non-U.S. defined benefit plans are expected to reach $6.35 trillion by 2002, up from $3.43 trillion at year-end 1995.
In comparison, non-U.S. defined contribution assets totaled $487 billion at the end of 1995, and are expected to reach $1.35 trillion by the end of 2002.
At year-end 1995, nearly half of the defined contribution assets were concentrated in Europe, which had some $239 billion in assets. The Pacific Basin followed with $156 billion.
But the popularity of defined contribution plans could be dampened if workers find they are retiring on half the benefit of neighbors covered by defined benefit plans. "The pendulum could swing back the other way," Mr. Oxley said.
The result, some experts think, could be a move toward hybrid plans that combine elements of defined benefit and defined contribution plans.
What is less apparent to U.S. observers is that overseas defined contribution plans might be a far different beast from the prototypical U.S. 401(k) plan, affecting how foreign DC plans are invested and the role of service providers.
"The big U.S. mutual fund managers of this world who think they can steam into these with their existing products will have to adapt," Mr. Oxley said. Money managers "will have to tailor their products to individual marketplaces," he added.
Lack of investment choice
What is most striking is the lack of investment discretion by participants in most world markets, with the exceptions of such countries as Great Britain and Australia.
But even in Britain, money managers say participants select the default option - increasingly a lifestyle plan option - about 95% of the time.
The high levels of investment technology used by leading U.S. mutual-fund houses would not be required if investment discretion is not permitted, Mr. Oxley said.
Without the need to provide individual accounting across a series of investment choices, money managers essentially can provide the same type of products as they currently do, although perhaps with a greater reliance on pooled vehicles, he said.
"I don't think you will see, outside of the personal pension area, huge amounts of money flowing into mutual funds," Mr. Oxley said.
Guaranteed rates of return
Individual investment choice also is unlikely to emerge in some countries, such as Switzerland, where plans legally are required to offer participants a guaranteed rate of return.
In that type of environment, employers probably won't offer participants investment discretion, because the company would be on the hook for any shortfall, Mr. Oxley said.
What's more, legal questions remain as to whether companies can shift complete responsibility to participants.
Explained Hasan Abdat, investment strategist for IBM Corp.'s international internal consulting unit based in Feltham, England: "There's no doubt about it. All multinationals would like to transfer the U.S. model to the rest of the world. But there's still a question mark in Europe how much liability you have transferred to the employee."
Other differences between U.S. and other models of defined contribution plans exist.
In some countries, the participant receives a share of the fund's profits, smoothed for market fluctuations. In bull markets, the participant receives only a portion of the return, as part of the gain is held back for bad years.
The upshot is that some of these "defined contribution" markets are more akin to hybrid schemes.
Provident systems emerging
In Latin America and a number of Pacific Basin countries, such as Singapore and Malaysia, a centralized provident fund operates with individualized pension accounts, often in place of traditional pay-as-you-go state pension schemes. Such conversions may start taking place in Western countries, including the United States.
And in European markets just turning to private pension systems, such as France and Italy, they all are clearly going in the direction of defined contribution systems. The question is whether cash-strapped governments will be willing to provide adequate tax incentives to make the new systems viable, Mr. Oxley noted.
The German government is expected to introduce a new form of retirement savings vehicle, Pensions Sondervermogen, in early 1998, but it remains unclear whether the government will propose any tax incentives, given its need to meet financial targets for entrance into European economic and monetary union.
The issue of bundling of investment and administration with one service provider also is viewed differently overseas, InterSec officials noted.
In many countries, benefit consultants control administration of plans, leading them to be biased against bundling. Meanwhile, plan sponsors are reluctant to hand over asset management and administration to one organization, the study noted.
"We don't see a great demand for one-stop shopping," Mr. Oxley said. Corporate pension managers "want to be the link between participants and the pension fund manager," or at least maintain control through third-party administrators, he said.