DC pensions around the world

    DC pensions around the world

    The All Blacks won the 2015 Rugby World Cup, but unlike many of their opponents from around the world they may not be winning the odds on a comfortable retirement.

    New Zealand’s annuity offerings are in decline because of market failure and taxation changes; none at all were sold in 2014.

    Pension reform across the globe has transformed accumulation of retirement wealth in the past 20 years but with wealth comes responsibility. Pensioners are not necessarily spending their pension pots wisely or seeking advice to help them do so. We question whether there are enough innovative products available to bring pension saving to a better conclusion.

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    Research by Tor Financial Consulting for the Defined Contribution Investment Forum - Global Comparisons of DC Plan Investment Design, looks at some of the outcomes of retirement saving in Australia, Chile, New Zealand, South Africa and the US. It has been compiled with the help of experts in Australia, New Zealand and the US. The report provides insights for the UK in what the future may hold for DC members and retirees as pension freedoms and auto-enrolment become more of a reality. Trends and observations are grouped in six major themes.

    Product Design

    All five countries have public policies aimed at encouraging employees to save for retirement primarily through employer-sponsored defined contribution plans. Countries have achieved this through tax incentivised plans such as the US’ 401(k) programme, the ‘soft compulsion’ of auto-enrolment (New Zealand) and the ‘explicit or hard compulsion’ of Australia, Chile and South Africa. Larger pension pots have been achieved to provide workers with greater flexibility and options in retirement, but the strategy has required further intervention.

    Australia and the US have placed more focus on the design of default funds. Target-date funds have received backing from policymakers in the US. The UK is picking up these trends through a growing interest in target-date funds and best practice, through governance overlay, in the development of default solutions.

    All the countries have attempted to maximise the rate of contributions into DC schemes. Contribution rates of 9.5 per cent or 10 per cent of prescribed earnings in Australia and Chile and best practice employer and employee matching of 6 per cent in the US mean that retirement pension pots are being directly shaped by government and industry product design in the accumulation phase. One problem with this is that pension savers (particularly in the UK and New Zealand) see the minimum contribution rate as generating the ideal replacement rates for retirement when this may not be the case.

    Three broad retirement income or disbursement options have developed for plan members as they approach retirement: taking retirement savings in a lump sum and investing these funds in banking or managed accounts solutions; opting for an allocated pension or drawdown solution invested principally in conservative equity, bonds and cash solutions; and traditional and flexible annuities.

    The last option has raised much public policy controversy in the UK. Freedom and choice have eroded the previous policy of compulsory annuitisation by the age of 75 years. Yet in Chile we see 65 per cent of retirees taking an annuity, South Africa has a growing market in flexible annuities, where traditional annuities are combined with fund management products, and the sale of annuities to Australian pensioners is increasing. This contrasts with New Zealand where annuities have declined and investment in rental property has thrived. The unintended consequence of this trend has made it tougher for younger workers to get on the property ladder and, in some cases, led them to borrow from their KiwiSaver pension accounts.