May 2008 EBRI Policy Forum
Global Defined Contribution Themes
Implications for US policy
Barbara Marder, Worldwide Partner
Global Defined Contribution
Consulting Leader
www.mercer.ca
Global DC Themes
“The world of retirement has changed and we live in a definedcontribution world now”*
* Karen Salinaro, IBM's VP of
 US
– Pension Protection Act
 China
– Enterprise Annuity
 Canada
– Ontario Expert Commission
– Alberta/BC Investigation
 Hong Kong
– Proposals :
 Europe
– Pan European developments
– EFAMA Report : DC Schemes : Risks
and advantages for occupational
retirement provision

United Kingdom
– Regulatory push for improved DC
governance
– Cessation of DC contracting by 2012
– Statutory requirement to provide DC
projections annually
– 2012 Personal Accounts
 South Africa
– Holistic review of retirement funding
Benefits and Compensation
 Voluntary MPF contributions
 Choice of MPF Trustee
 Indonesia
– 2008 DB funding requirements may
lead to more DC conversions
 Thailand
– DC legislation expected 2008/9
 Australia
– Tax incentives
– Looking to simplify – ease of
consolidation
 Chile
– Realization that cost structure is
too high
and social security
Mercer (Canada) Limited
1
Global Themes
The world is flat!

Will DC schemes deliver?

Benefit adequacy concerns:
– Contributions insufficient (often less than DB)
 Or not even enrolling
– Returns are too low:
 Poor asset allocation – too conservative
 “switching”
– Fees are too high
 Focus on expenses
– Poor investment performance
 Insufficient focus on managers
Mercer (Canada) Limited
2
Global Themes
The world is flat!

Societal view:
– DC funds transfer risks to the group least capable of managing
them
Retirement Services Roundtable – Cracking the Participant Code
–
Government has increased its attention to these issues
Mercer (Canada) Limited
3
Global Themes
The world is flat!
Additional concerns:

Member engagement

Member education/financial literacy

Leakage through pre-retirement withdrawals and borrowing

Cyclical retirements

What happens at retirement?
– “good bye and good luck”

Longevity risk, what’s that?

Governance – who is overseeing DC plans?
Mercer (Canada) Limited
4
Global Themes
DC Investments
 Desire of participants to “delegate” decision making to a third party
– Trend to reduce the number of funds offered
– European DC survey: Plans offer 15 investment funds on average. 75%
of plans offer a default option, used by 70% of members
– UK DC survey: Median no. of funds offered in contract-based plans is
52. 85% of plans offer a default option.
– Lifecycle/lifestyle/target age/target date funds are universally popular
(but, surprisingly, not in Australia) and a common default option
 Prediction that $920 billion will flow into these funds over the next 5 years.
 Prediction that 75% of all 401(k) assets will be held in target-date funds
within 5 years
 Custom life cycle funds are gaining traction at the large end of the market
 Alternatives are creeping into DC plans, usually as a “bundle”
 Increasing desire of plan sponsors to delegate authority to third party
Mercer (Canada) Limited
5
Global Themes
The world is flat! Or is it?
In reality responses will differ due to regulatory regimes
But some global convergence is likely
UK/North America
Australia/Hong Kong
 Target date/ lifecycle funds
 Few options
– PPA (USA)
– UK age-based/US target year
 Rationalization of investments
 Enormous focus on fees
– Full disclosure
 Inertia accepted as a reality
 Save more tomorrow
 Conventional assets, fixed asset
allocation
 Annuitization (UK)
 Strong employer role
Mercer (Canada) Limited
– Generally balanced/target risk
 Target date/lifecycle unpopular
– Disengages employees?
– Inappropriate near retirement
– Age is too simple a factor
 Alternative assets, dynamic asset
allocation, diversification (Australia)
 Strong focus on communication,
education
 Strong influence of financial planners
 Lump sum payments only (Australia)
 Employer role is marginalized
6
Global Themes
Lessons from Australia (most mature DC market)?
Environment is different:
 Compulsory membership and contributions
 Lump sum on retirement
 Master trusts
Lessons?
 Even if target date in place need for engagement/communication
 Target date models can be improved
– Why should DC schemes have “simple” investments?
– More thought to be put into near retirement lifecycle offerings
 Financial planning community has a strong influence
Mercer (Canada) Limited
7
Global Theme - DC Communications/Member Engagement
- Where does communication end and financial planning begin?
- Will automation be the real answer?
Targeted Communications:
Personalized and/or
Participant segmentation
Generic Communications
Financial Education
Provided by 3rd party
Managed
accounts
Employer-sponsored
Education seminars
Financial Planning
49% of workers are interested in getting
financial advice at their workplace
about saving for retirement (up 11% from
the previous year)
44% expressed interest in overall financial planning
MetLife annual ee benefits trend survey
Mercer (Canada) Limited
8
Global Themes
Investment independence and fee transparency
 Australia
 US
– Complete fee transparency
– Focus on fee disclosure and fee
– 2006 Choice of Fund legislation,
transparency
– DC “unbundling”
 highest degree of cost
transparency
 Best in class providers for each
function
– April : Financial literacy month
employees can choose any plan
 Asia
– Bundled and unbundled
arrangements in China, India, HK
 UK
– Stakeholder pensions have a
legislated “cap” on fees
– FSA requirement to disclose
commission levels
 Chile
– “Ideal” pensions model but severe
weakness was fees
 South Africa
– Government is concerned at the
 Canada
– Insurance companies dominate,
control investment manager access
– Fees primarily bundled, must be
disclosed to members
– Offer externally and internally
managed funds
 target date funds biased towards
in-house funds
quantum of fees
Mercer (Canada) Limited
9
Global Themes
DC plan management best practices
 Heightened scrutiny on plan governance/compliance
– Maturing of DC market brings evolving standards and requirements
– Change is happening fast
– Duty to act in best interests of members
 Mandated governance practices in Ireland, Netherlands
 Voluntary Employer Engagement best practices released in UK, similar
guidelines in Canada (CAP guidelines)
Mercer (Canada) Limited
10
Global Themes
Emerging themes

What are consequences if DC (or DB) schemes do not deliver?
– Increased taxes?
– Government is getting more involved (UK, USA, South Africa)
– Will people simply not retire? Will they all retire if returns are
really good?

Lifecycle funds
– Customised lifecycle funds – not off the shelf
– Phase II?

Post-retirement phase
– Huge development in post-retirement options
– Annuities have never been popular so what will be popular now?

Savings beyond DC
Mercer (Canada) Limited
11
www.mercer.ca