"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10." Bill Gates, in "The Road Ahead."
The defined contribution world is poised for change. It will take time — $20 trillion systems aren't transformed overnight — but don't let that fool you into underestimating just how big the change will be.
It helps to have a global perspective. While each market is driven by local factors and most of the conversations are local, there are global themes that underlie the changes. A clearer picture emerges when we look through a global lens.
One theme across most major markets is an increased focus on lifetime income provision. DC is meant to provide income that supports participants throughout retirement. But in its early days, DC was all about the accumulation of assets. That's understandable: the payout phase was not a high priority when the system was largely a supplement to defined benefit plans and retirement was many years away. Today, it's a more mature system and the primary source of retirement security for tens of millions of workers. So it's not enough to grow a pot of assets; those assets need to be converted into a stream of income.
So lifetime income is one global theme. And it is likely to be an area of increasing emphasis everywhere there is a DC system that is moving from middle age to maturity.
And lifetime income provision is an area that cries out for innovation.
What makes managing the payout phase difficult is that some individuals live longer than the average. And some individuals live a lot longer than the average. So this is really a problem of insuring against an unexpectedly long life. But how to do it? Various solutions have been suggested, but none has become the dominant approach.
The investment industry is generally very effective in creating products that respond to demand. That's the key question here, though: Demand for what? Most individuals approach retirement with just a general sense of what they believe to be possible, and a loosely defined set of preferences. This is not an optimization challenge; it's about understanding and creating clarity around what retirees really need when it comes to lifetime income and longevity insurance and then crafting a solution.
Another question related to lifetime income — and also begging for innovative thinking — is reporting. If the system really is focused on delivering income, not just on accumulating assets, then shouldn't reporting reflect that focus? After all, what gets measured … well, you know the rest.
So lifetime income is a big area of change, and it's only going to become more evident throughout the system over time.