There is a general acceptance among industry experts, policymakers and governments that global retirement systems must be reformed, said EY's global pension report released Wednesday.
The report, which draws from more than 80 interviews with retirement-related professionals both on the defined benefit and defined contribution side, found that robust pension and retirement systems revolve around five tenets — financial adequacy, financial stability, performance, efficiency and effectiveness, and political aspects — and highlights opportunities for reform.
In the future, there needs to be an increased focus on the operational excellence of global pension and retirement systems, the report says.
Graeme McKenzie, global pension leader for EY, said operational excellence goes beyond cost analysis. Investment returns and plan participants should also be taken into consideration, he said.
“The cost and investment return equation is really critical,” said Mr. McKenzie in a telephone interview. “Sometimes investment options or profiles could be more expensive but are ultimately what might be in the better interest to members.”
Retirement professionals should look to other industries, such as banking or securities' processing, for ideas on how to improve efficiency and effectiveness, the report stated.
“Banking is fairly efficient,” said Mr. McKenzie. “It's very electronic, seamless.”
Complex retirement systems should also be simplified for plan participants, according to the report. Systems that are overly complicated “limit system confidence, engagement and willingness to contribute voluntarily or exercise choices,” the report said.
Simplification is especially crucial for defined contribution plans where participants are required to select investment options, said Mr. McKenzie.
In the future, benefit expectations will need to be rebalanced as well. Global retirement systems are strained by “increasing longevity and expectations of generous retirement benefits vs. dwindling financial resources to safely meet those expectations” according the report. In an effort to meet future liabilities, countries have opted to raise the retirement age. However, Mr. McKenzie did note that raising the retirement age can be a “challenging” policy to sell.
Other steps to achieving retirement system reform include acceptance of a new level of regulation, supervision, governance and transparency; encouraging local financial markets to evolve “concurrently” with growth in pension assets; recalibrating investment functions and investment management; and becoming customer-centric, according to the report.
