All DC systems involve six or seven fundamental building blocks, including adequate individual contributions, tax incentives, good systems for disclosure and education, and some control of egress, noted Donald Kanak, Hong Kong-based chairman of Eastspring Investments. Those are the areas that could see continued changes “around the edges,” he said.
Market veterans say for the most part the right mix of those building blocks has remained elusive.
For example, contribution levels remain too low, noted Paul Kelly, London-based director of benefit consulting at Towers Watson & Co. “In Europe, with the exception of the Netherlands and possibly Denmark, it's typically below 10%. That's not enough,” he said.
For some experts, Chile's DC system — launched in 1981 and hailed as a model for pension programs around the world since then — comes close.
Chile meets most of the Paris-based Organization for Economic Cooperation and Development's latest recommendations and guidelines for best practices in DC design, said Pablo Antolin-Nicolas, principal economist in the OECD's private pension unit. “It's not perfect, but quite good,” he said.
That nation's compulsory individual account DC system is set up to supplement benefits received from Chile's first-pillar public system, a government-funded, non-contributory pension subsidy, with lower-income retirees receiving more of a safety net if they haven't saved enough in their DC portfolios. Furthermore, incentives such as matching contributions are available to younger workers to encourage savings.
However, even Chile's system leaves male participants with retirement incomes of 64% of their pre-retirement incomes — the figure is just 50% for women in Chile — both less than the 69% average for all people in OECD countries, according to OECD data. Furthermore, only about 60% of the country's labor force is covered, even after recent government initiatives to expand the DC program to include self-employed individuals.
Portions of Chile's DC design have been imported by a number of other countries, including Mexico and Colombia. In Eastern Europe, nations such as Hungary, Poland and Latvia also have copied certain aspects of the Chilean model. However, in many of these systems, serious faults have emerged.
For example, following the 2008-"09 financial crisis, earlier pension reforms were reversed in countries such as Argentina, Poland and Hungary to cover budget shortfalls. While governments technically borrowed from their respective country's pension pot, the move likely will result in higher taxes or lower benefits to future retirees, sources said.
“Chile didn't do any of that,” said Mr. Antolin-Nicolas, who warned that DC plans that allow governments to tap pension savings for other purposes risk leaving participants “disenfranchised.”
Sometimes, participants themselves dip into their retirement savings.
In Asia, where combined contributions by employees and employers in countries such as Singapore and Malaysia top 20%, the ability of participants to tap savings for pre-retirement investments in property or to pay for higher education has raised questions about the adequacy of even those hefty savings rates.