Pension plan designers around the world are tackling the challenge of retirement income adequacy with varying degrees of success, said speakers at Pensions & Investments' inaugural Investment Innovation and the Global Future of Retirement conference in New York.
Attendees came from 11 countries that together represent 90% of all global retirement assets.
Part of the challenge is to design systems that are cross-generational, said Gordon Clark, professor and director of the Smith School of Enterprise and the Environment at the University of Oxford, Oxford, England. “We can design a system that is adequate for this generation — but the idea is to be intergenerationally equitable,” Mr. Clark said.
In Germany, “adequacy is at the center of the political debate,” said Andreas Hilka, managing director-head of pensions at Allianz Global Investors Europe, Frankfurt. A government proposal to lower the retirement age for some to 63 will cost Germany e190 billion ($258 billion) over the next 15 years, “and people wonder if (that money) could have been invested in a different way,” said Mr. Hilka.
Defining what constitutes adequacy and how to pay for it “is problematic” until people place greater value on their pension contributions, said Ash Williams, executive director and chief investment officer at the $181.9 billion Florida State Board of Administration, Tallahassee.
The level of engagement over income adequacy varies widely around the globe. In China, where average life expectancy has improved in recent years, pension benefits are “a problem China is afraid to tackle,” said Stuart Leckie, vice chairman of the Hong Kong Retirement Schemes Association. “There is much more concern about employment than pensions, but that will change, I think.”
He noted the United Nations predicts there will be 420 million people above age 60 in China by 2040. “Is China ready for that pensions-wise? The answer is no,” Mr. Leckie said.
In the U.K., “over the next 12 months there is going to be a pretty big debate” on the future of defined contributions plans and what they look like, said Paul Todd, assistant director of investment for the National Employment Savings Trust, or NEST, a £120 million ($200.8 million) DC plan sponsored by the U.K. government. “There is a lot of concern of DC as the poor relation to DB” when it comes to contribution levels. “There is a big debate in the U.K. about how to turn these pots into income in retirement,” said Mr. Todd.
In Chile, lifecycle investment strategies are helping to improve retirement, said Solange Berstein, former head of the Pension Supervisory Authority, which oversees the institutions involved in Chile's pension system. Officials now are considering some limits among participants to boost contribution levels by requiring higher default levels. “Default options are critically important,” said Ms. Berstein.
With fixed contribution levels in Australia and a reluctance to reduce benefits, “the only risk control lever we have in place is the asset allocation strategy,” said David Schneider, head of research and quant methods for A$35.5 billion UniSuper Management Pty., Melbourne, a superannuation fund for the higher education and research sector. One new initiative involves sorting investments into three categories, from low risk to high risk.