Retirement policy was the topic of conversation for the closing round table of Pensions & Investments' inaugural Investment Innovation and the Global Future of Retirement conference.
Three panelists at the conference, held June 22-24 in New York, presented the challenges facing retirement executives in Australia, the U.K., Germany and the U.S.
“(Australia's) contribution rate is OK,” said Gordon Clark, director-Smith School of Enterprise and the Environment at the University of Oxford in England. “It is 9% to 12% of gross income, which is a good thing. But as we see, (that) isn't enough and there is a great deal of hyperbole.”
He said there is also “tremendous myopia” by participants, who focus on the short-term results rather than long-term goals.
Mr. Clark also discussed the U.K., where he said defined benefit funds are “closed in virtually every sector.”
He said the move toward defined contribution requires financial literacy. “My reaction is "what a wonderful idea' that we go into schools and build numeracy ... but the campaign exposes a fundamental problem — our numeracy skill test scores are really low.”
He said the answer is to structure the choices that DC plan participants must make “within parameters that they understand ... and in a forum that is relevant to their lives.” He also stressed the DC participants are a “diverse population.”
He said research by his institution showed three segments of DC participants. The top third are skilled and have some idea of what they are doing; the middle third have “an inkling of the issues; and the bottom third ... will never get it. Ask yourself as a DC sponsor: to whom do you owe the most in terms of a retirement solution? I think on the DC side we owe the most to the people who can do the least for themselves. I'm not saying take it over entirely, but (offer) structured solutions in a narrow range of options,” providing education to help participants make the choices relevant to them.
Andreas Hilka, managing director, head of pensions, at Allianz Global Investors Europe in Frankfurt, discussed Germany, where he said 85% of old-age income comes out of the country's pay-as-you-go system.
With a new government in office, he said issues are brewing as the government looks to reform pension policy.
The final presentation focused on the U.S.
“Why is the U.S. losing?” asked Ash Williams, executive director and chief investment officer at the $181.9 billion Florida State Board of Administration, Tallahassee. “Because corporate America has largely abandoned the whole income replacement thing. In the U.S., DB plans, which have provided that refuge for lower-income people, are essentially only found in the public sector now. There is jealousy from those that do not have it.”
He said the problem is that rather than talking about “achieving replacement income, to be stable, to avoid (the) creation of an elderly underclass ... (the population is) indulging the jealousy and there have been very concerted attacks on DB based on that jealousy.”
The answer, he said, is to “get past that and think of pensions as the engines of consumption that they can be. Pensions are a cheaper alternative to what could ultimately happen - (participants) become wards of the state.” n
