Every aspect of defined contribution plans has remained open to debate and tweaks, but increasingly the goal of turning DC savings into an adequate income stream for retirees is the elephant in the room.
For plan design, the transition from accumulation to decumulation “is the next key policy question,” said Jonathan Lipkin, director of public policy at the Investment Management Association, London.
While plan sponsors and regulators have made progress in harnessing consumer inertia in the accumulation phase via auto-enrollment and default options, solutions to ensure people can tackle the more complex decisions on marshalling their savings in retirement remain less thought-out, he said.
With demographic trends poised to further weigh down retirement systems around the world, industry veterans say addressing that gap is a matter of urgency.
A livable income stream should be the goal, rather than getting an impressive-looking lump sum upon retirement, said Don Ezra, co-chairman, global consulting at Russell Investments, New York. In a properly constructed system, a participant should earn more in investment returns on his accumulated DC savings after retirement than he did in the 30 to 40 years leading up to retirement, he added.
Increasingly, the DC conversation is coming around to that topic.
Australia's A$1.5 trillion (US$1.5 trillion) superannuation system has been more focused on which fund got the best returns last month than the question of long-term returns. But “we're beginning to make that transition,” said Alex Dunnin, head of research with superannuation and financial industry research firm Rainmaker Group, Sydney.
A quick pivot on that issue could potentially benefit DC participants around the world that receive lump-sum payouts upon retirement, leaving them at risk of outliving their savings.
For example, Charles Lin, a Hong Kong-based managing director with Vanguard Group and the firm's head of institutional sales in Asia, said it's still early days for Hong Kong's relatively new mandatory DC plan, launched in 2000, but there's evidence that retirees in Hong Kong have been running through their savings within seven years of retirement.
Funneling defined contribution savings into annuities that can provide an income stream for plan members until the day they die is one solution worth exploring.
However, in those countries with compulsory annuities — such as Switzerland — or strict regulations that tend to favor the purchase of annuities, including the U.K. and Chile, annuities have not necessarily provided a secure stream of retirement income either, sources said.
In the U.K., for example, the combination of longer life expectancy and low yields on government bonds that are used to back the annuities have had devastating effects. Average annuity rates have fallen about 30% in the past four years alone, pension experts said.