1403-1221909 building a better retirement final2 building a better retirement world contents 01...

1Insights for better outcomes in the global pension and retirement market

Building a better retirement worldInsights for better outcomes in the global pension and retirement market

2 Building a better retirement world

Contents01 Introduction02 Executive summary03 About this report

04 Pension and retirement heat map06 Framing the right questions

07081012 Acceptance of a new level of regulation, supervision, governance and transparency 14 An increasing focus on operational excellence16 A recalibration of investment functions and investment management18 Find simplicity in complex systems20 Need to connect and become customer-centric

22 Policy reform globally — current status and future opportunities26 Global business opportunities for pension and retirement providers28 EY proposition30 Conclusion31 Overview of 18 pension and retirement markets globally

Insights for better outcomes in the global pension and retirement market 1

IntroductionMost countries and stakeholders have been struggling to varying

1. Financial adequacy.

2. Financial sustainability.

3. Performance.

4.

5. Political aspects.


1.

2.

3.

4.

5.

6.

7.

leaders throughout the world.

Executive summary

Executive summary

3

About the report

•

•

About the report

United States

Mexico

Chile

Canada

Denmark

United Kingdom

Spain

Netherlands


Figure 1

Source: EY

Legend of short- to medium- term business opportunities

Not assessed

Pension and retirement heat map

Mainland China

JapanSouth Korea

Australia

Sweden

Singapore

Hong Kong

Switzerland

Germany

France

5

•

•

•

Pension and retirement heat mapwant to know how to grow new business

will require timely action and change in

market attractiveness methodologies.

Pension and retirement heat map


Aging and longevity have been debated

The tide has turned

environment has turned and to enable

Country context:

How do we build and

Sustainability: What diverse stakeholder needs and economic

sustainable and relevant solutions to

Professionalism: maintain and evolve adequate governance and management solutions that act

Informed decisions: How do we

Predictability: What measures do

Ease of approach: What solutions do we

outcomes: What decisions are

Framing the right questions

Framing the right questions

Figure 2

and retirement. retirement accounts.

Budget and liability focus make retirement a priority

Groups of retiring baby boomers make it real The GFC acted as a catalyst

Source: EY

Building a better retirement world

one

and retirement systems. This will require

Common responses to current challenges include the following:

In the

liabilities.

Increase retirement age — Many

age to better align to longevity.

but countries like the UK may

Source: Pensions at a Glance 2013

Notes:

Figure 3

Belgium

Canad

aChile

Irelan

d

South Korea

New Zea

land

Norway

Sloven

ia UK US

Australi

a

Mandatory pensionsPension gap

of the plan sponsor or government is a key issue, not just the actual pension promise.” US pension industry executive

Insights for better outcomes in the global pension and retirement market

Soft compulsion and automatic enrollment —in essentially voluntary systems reduces

automatically enrolled in a retirement

combines advantageous collective

smoothing and collective guarantees

“When it dawns on my students that they will have to pay the bill for current promises, many impulsively want to leave the country.”

Figure 4

age demands innovative solutions

need to work longer.

Working longer Demographics and politics Employment and labor relations

Source: EY

without adequately considering the time


twochallenge that assets are increasing

system growth in local markets. Within

• Capital market maturity and investment home bias:

bias can be an underlying reason

concentration risk and additional

• Multiple mechanisms to deliver

such as housing or social security

lead to unnecessary burden or

many governments and systems.

• retirement literacy vary by country:

retain member trust and encourage voluntary contributions.

need to evolve concurrently

“We need more agility and stress testing in pensions; the past decade demonstrated that vital assumptions can change more dramatically and quickly than we ever thought.” German industry executive

retirement systems requires

align concurrently. This works

in the local market need to evolve. This requires diverse


threeinherent risk to social and economic

retirement industry is as large as the banking sector or annual gross domestic

in most countries still has a long way

comes at a cost.

“Governments need to pay closer attention to implementing policy and delivery.” Malaysian industry executive

•

•

Acceptance of a new level of regulation, supervision, governance and transparency

Pensions market in focus: 2013

Figure 5

Canad

a

Hong Kong

IndiaIre

land

Nether

lands

South Korea UK US

Australi

a

92%

15%

67%

6%

34%

49%

160%

26%

82%

114%

96%

75%

5%0% 0%


•

•

and banking

retirement market have evolved over

their governance. Many solutions are

to avoid contagion risks.

“Protecting and appropriately compensating pension and retirement members from provider or sponsor insolvency,

identity theft or cyber-crime is underdeveloped globally — in spite of rapid asset growth and automation.” US pension industry executive


fourand enhancing risk management. Such initiatives come at a substantial cost.

Operational context

Many stakeholders collect and allocate

only two key avenues enable sustainable

retirement “products”

•

•

•

•

“We need to industrialize the pension industry globally to deliver better retirement outcomes.” Swiss pension industry executive

Economies of scale

systems in many countries is very

1. investment returns and substantial

2. have concluded that delivery

management.

3. retirement system delivery

assets under management. This assumes that delivery costs grow

including onboarding members and

delivering statements or assessing

But the dominant global way to

An increasing focus on operational excellence


Transparency

rare in most countries. This limited

“Operational equity between members from large versus small employers: they pay the same fees, but attract different levels of processing costs.” Chinese industry executive

•

•

•


Risk management

A recalibration of investment functions and investment management

• Aligning risk management to the

the investment management industry and investment instruments used

•

•

and solutions

Another unresolved question is how to include members in investment risk

are increasingly required to run their

risk management solutions that better address member needs. Outsourcing investment decisions to members

Investment operations

global and asset classes within one

“Double-digit returns can make you take your eyes off the ball internally.” US pension industry executive

“Pension funds and asset managers need closer cooperation to resolve big challenges such as decumulation.” US industry executive


to recalibrate the investment

solutions need to align to the

retirement assets. Only with

be restored.

Decumulation

are wrestling to varying degrees with

but solvency requirements and lower “Most investment principles and answers have existed for years, but are poorly followed by many entities.” Canadian industry executive


sixand retirement systems are

willingness to contribute voluntarily or

actively manage those dimensions.

through other measures leads to lower

members is vital.

• and social security services

•

• incentives

•

clauses

• abuses

Find simplicity in complex systems

•

• Increase voluntary contributions

• retirement

These three levers require member

contributions less likely. This directly

•

• other choices.

•

“Consumers want engagement when they want it, not when providers have traditionally provided it.” Australian industry executive


sevenincrease voluntary retirement savings

they want it. Through better customer

needs received little attention or

communication channels were rarely

Need to connect and become customer-centric

across the globe.

similar challenges in retaining members

or understanding.

Interviewees highlight three key

1. Customer strategy:

delivering customers what they want has been a key to success in other industries. This includes

Interviewees noted that making such changes in the historically

2. Customer experience: Members

“A vicious circle: poor member and employer experience adds to disengagement, which adds to higher cost and less money to improve experience.” UK industry executive

“Opt-out and auto-enrollment only address symptoms, but most members want empowerment to make informed decisions: themselves.” UK industry executive

media and digital solutions are

such tools build connectivity

with stakeholders on demand.

may need to consider the same

that the banking industry

it commenced systematically

3. Communication: Most interviewees

engagement and connectivity.

engagement and how much investment is warranted to increase

“… trying to enhance electronic engagement with members, but coming from a fair way back. We feel this is just the tip of the iceberg of what is really needed.” Australian industry executive


transitional measures to rebalance their

Policy reform globally


Figure 6

Adequacy

Sustainability

Investment management

Canad

aChile

Mainlan

d China

Hong Kong

Nether

lands

South Korea

Sweden UK US

Australi

a

High Medium Low

Legend

Source: EY



Figure 7

Two ends of the spectrum

Long-term investment expectations/discount rates

“Politics is about balance, not winning.” US pension fund senior executive

markets and economies means that


United Kingdom• •

• • •

United States• •

•

•

a. b.

c.

Spain• • • •

Canada•

• required to systems

•

Mexico• •

Chile• •

sectors and contribution increases


Figure 8

Source: EY


France•

• Low retirement age

Sweden• • •

Switzerland• •

• Hong Kong•

•

Singapore•

•

Japan•

• •

contribution and retirement age

South Korea•

•

Australia•

• Mandatory contribution increases

•

Mainland China•

•

•

• announced a new voluntary

The Netherlands• •

•



Global business opportunities for pension and retirement providers


Figure 9

“We see banks and

exploring capital market solutions to funding as well as pension buyouts or pension runoff businesses like in insurance.” US pension industry executive

“Do all stakeholders

long-term horizon and discipline to truly appreciate that the necessary upfront investment to win employers and members and build adequate infrastructure takes a decade to pay off — and create a stable annuity income?” Malaysian industry executive

20302014



Figure 10

“We need a reasonable amount

cost, maintain infrastructure and service capital.”Hong Kong pension industry executive

“We need pensions, but we do not need pension funds.” US pension industry executive

blue ocean business

market

service reach

InnovateMature markets with modest

servicing or outsourcing are common System or the South Korean Individual

international market entrants. How can


We understand the issuesOur teams have been involved in all

EY proposition

EY proposition

countries. While asking the right

We can align policy, reform and commercial perspectives

We combine insight with experience


Insights for better outcomes in the global pension and retirement market

Figure 11

Pension and retirement policy, strategic delivery and industry supervision: we support, design, review and evolve

•

and evolution• Assessing

•

and delivery

Enabling areas for your pension and retirement business: we assess, review, design, improve and implement

•

change• Technology

and data•

management•

management

•

•

“Traditional” EY services

• Audit and assurance

• • Transactions

and valuations

Strategic context for your pension and retirement business: we compare and contrast, as well as design, evolve and adjust

• regulatory

•

•

Delivery of outcomes for your pension and retirement business: we assess, review, design, improve and implement

• Investment management

•

and business

• members and

•

• management

• management

Our services for governments, as well as public and private sector pension funds

EY proposition

We understand the issues


Conclusion

Conclusion

31

Overview of 18 pension and retirement markets globally

Sources:


Statistics Dependency ratio

Number of pension funds 325

23.2 Pension fund assets as % of GDP

• • • •

• Mandatory savings through

• •

• • •

•

• Additional voluntary

•

• •

Recently implemented•

Recently implemented/in progress•

• • • • •

•

•

Market structure

Pillar 1

Pillar 1

Pillar 2

Pillars 2 and 3

Pillar 3

Pension and Retirement Business Opportunity score

Selected sources: Department of Human Services website; Department of Families, Housing, Community Services & Indigenous Affairs website; Stronger Super website; Minister for Financial Services & Superannuation, Press Release: Super bills pass Parliament and mark completion of reform agenda, 25 June 2013; ASFA, Status of Stronger Super reforms, July 2013; ICAA, Key legislative contribution changes, update as at 1 August 2013; Australian Government Treasury/Charter Group, A super charter: fewer changes, better outcomes, July 2013

Note: Private pension system is referred to as “superannuation.”

Note: Major reform law in 2008 addressing policy issues such as worker coverage, pension adequacy and administrative fees

Australia

33

• • • • • •

•

•

•

• • • •

investment returns

•

•

• • •

•

• • Annual contribution limits•

Canada


•

•


•

•


Number of pension funds


Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


2011; Service Canada website; Regie du rentes Quebec website; OECD, Pensions at a glance, 2009 and Private pensions outlook, 2008; Social Security Administration (US), International update, May 2013 and January 2012





•

•

•

those over 65 who have contributed

with Solidarity Contribution

•

•

•

•

•

•

•

• •

• Additional contributions to mandatory account

•

•

•


In discussion•

•


•

•

•

on monthly contributions

•

In discussion•

to increase retirement sums


In discussion•

savings schemes and incentives

Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Superintendencia de Pensiones website; ISSA, Good practices in Social Security: the pension reform in Chile, 2010; Social Security Administration, International update, January 2012 and May 2011; Social Security Bulletin, Next generation of individual account pension reforms, 14 February 2011

Note: Major reform law in 2008 addressing policy issues such as worker coverage, pension adequacy and administrative fees

Chile

35

•

•

•

•

•

to individual accounts •

•

• • •

• allowed to manage and administer

•

•

•


•

income urban residents

•


investments in wealth management

In discussion•

may take some years to resolve

In progress•

insurance scheme has received the

•



Pension fund assets as % of GDP

Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: China Ministry of Human Resources & Social Security website; Asia Insurance Review, China: Foreign insurers to be allowed to take part in pilot runs of national tax-deferred pension plan, 18 July 2013; ADB, Pension systems in East and Southeast Asia - promoting fairness and sustainability, 2012; International Social Security


•

• •

•

•

•

•

•

•

•

•

•

•

•

•

•

•

• •

• •

• •

•

In progress•


•

• Age at which early retirement can be

•

•

•

•


315 Number of pension funds


Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3

Sources: ISSA, 2013, ATP, borger.dk, Forsikring & Pension (Danish Insurance & Pension Association)


37

•

•

•

•

•

•

•

based on collective agreements •

•

• •

•

•

•

•

• •

•

Pensions Services Act 2013.

Note: Two-tier system — public pension (Pillar 1) + supplementary mandatory occupational schemes (Pillar 2), based on points system

Recently implemented/in progress• Minimum retirement age

•

•

In discussion•

•

• •




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


2011; European Social Observatory, Current

outcomes and output, 2010


•

• government subsidies; contribution

•

•

•

•

•

•

•

•

• •

•

•

•

•

•


In progress•


•

In discussion•

In discussion•

a threat to insurance carriers due to their heavy investment in bonds and

to remove these guarantees




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


2011; Occupational Pensions Association (ABA), 2013; Association of German Insurers (GDV), 2013




• Social Security Allowance Scheme •

•

• •

• Contributions covered by government

• •

• •

• additional voluntary contributions

• •

• • •

on scheme regulation

• Voluntary retirement savings•

•

•

Hong Kong

• Recently implemented•

their mandatory contributions and

In discussion•

considering various measures to

•

•

• •

•

Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


2011; MPF Schemes Authority website; HK Social Welfare Department website; MPFA, Press release: MPF Employee Choice Arrangement to commence tomorrow, 31 October 2012





• • • •

• In addition• •

•

•

monthly salary and bonus• •

• •

•

• businesses

•

•

•

• •

• •


In progress•

•

•

In discussion•

•


In discussion•

•

•

Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: OECD, Pensions at a glance 2011; IMF, The future of occupational pensions in Japan, January 2013; IMF, Social security pension schemes

and the issues, January 2013; Social Security Bulle-tin, The Evolution of Japanese employer-sponsored retirement plans, Vol 67, No 3 (2007)

41

•

accounts are below a certain threshold

• Based on minimum wage

•

•

• •

•

contributes subsidy to accounts•

•

•

•

•

• mandatory vs voluntary systems

•

• Voluntary retirement accounts

•

In discussion•

•

available to those who are members

• •

•

•

• •

•

In discussion•




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: OECD, Pensions at a glance, 2011;

Administration (US), International update, Nov 2012 and December 2011; CONSAR, Mexico s pension system: a growing funding source for long term and productive projects, 2013; BBVA, Pension reforms in Latin America: balance and challenges ahead, 2010


•

•

•

•

• Social assistance is available to those with a total income less than

•

•

•

•

•

•

•

• Annuities or endowment insurance

•

•

Netherlands

In discussion• Accelerating the rise in retirement age to

In progress•

•

•

•

• •

In progress•

line with the changes in retirement age and




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: OECD Pensions outlook, 2012 and Pensions at a glance, 2011; Dutch Association of Industry-wide Pension Funds, The Dutch pension system; Social Security Administration (US), International update, April 2012

43

•

•

•

•

•

•

•

•

setting aside more retirement savings

•

• Individual accounts with various

• account holder

•


•

•

•

•





Market structure

Combination of Pillars 1 and 2

Combination of Pillars 1 and 2

Pillar 3

Pillar 3


Selected sources: OECD, Pensions at a glance: Asia

on initiatives relating to CPF; Singapore Government News, The CPF (Amendment) Bill 2012 Second Reading, 10 September 2012; Ministry of Finance website; Singapore Ministry of Health website; Ministry of Manpower, Retirement and Re-employment Act webpage


• • •

• •

• •

• National basic livelihood security scheme •

•

• •

•

• •

• •

•

•

• •

retirement insurance •

retirement trust•

South Korea

In progress•

•

In discussion•


•

•

•

•


to encourage saving

•




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: National Pension Research Institute, Pension reform options in Korea, 2013; Asian Development Bank Institute, Demographic changes and pension reform in the Republic of Korea, 2009; OECD, Pensions at a glance, 2009; Korea Capital Market Institute, The revision of the Employee Retirement

45

•

•

•

•

•

•

•

•

• •

• These schemes must be

•

•

•

• but no deductions available

•

• •

•

•


•

•

discourage early retirement

In discussion•

•

In discussion•

•




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: OECD, Private pensions outlook,

Security Administration (US), International update, January 2013; Insurance Europe, Income tax treatment of 2nd pillar pension products (as of December 2012)


•

• Three tiers•

•

•

contributions invested in investment

•

•

•

sector; central government and local

•

•

•

• • •

•

• • •

•

In discussion•

• Ways to encourage older workers to continue working

•

• •




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: OECD, Private pensions outlook, 2008; Swedish Pension Agency, Annual report 2012; Swedish Investment Fund Association, Facts and myths about the premium pension, January 2013; Nordic Region Pensions & Investment News, Country Focus: Sweden — Set up of probe into occupational fund regulation signals a ministry u-turn, 1 April 2013; Esmerk Swedish News, Sweden:

26 February 2013; Social Security Administration (US), International update, May 2013

Sweden

47

•

•

•

government also contributes

•

•

•

contributions increase with age

•

•

•

•

•

•

• •

limits and withdrawal restrictions•

no contribution limits and can be withdrawn at any time

•

In discussion•

•

•


In discussion•

including a gradual reduction in

•




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: Pensions & Development Network, Country database: Switzerland; Federal

Administration website; EURACS, Pension summary: Switzerland, 2013; European Pensions, Staying strong, February 2013


•

•

•

•

•

• •

must meet certain minimum standards•

•

•

•

• career average scheme

•

•

•

•

bought an annuity; wide asset choice

•

United Kingdom

Pensions Services Act 2013.


beyond age 65

•

•

•

In progress•

•

•


•

•

• Mandated total minimum contributions

•

•

In discussion•

•

•

as more alternatives to annuities




Market structure

Pillar 1In transition

Pillar 1

Pillar 2In transition, major between 2013 and 2018

Pillar 2

Pillar 3

Pillar 3


Selected sources: The Pensions Regulator website; Pensions Policy Institute website; National Employment Savings Trust (NEST) website; IMA, Asset management in the UK 2012–2013: the IMA annual survey, 2013

•

•

•

•

•

•

•

•

•

•

•

• •

retirement accounts•

•

•

• Allows rollovers and contributions

• •

•

•

Note: Special employer-sponsored IRAs available for smaller businesses and sole proprietors under Pillar 2, e.g., Savings Incentive Match Plan (SIMPLE),

operate in a similar way to Pillar 2 options

In progress• Increasing retirement age to 67 by

In discussion•

•

•

•

•

•


In discussion•


reform may put pressure on tax incentives under Pillars 2 and 3




Market structure

Pillar 1

Pillar 1

Pillar 2

Pillar 2

Pillar 3

Pillar 3


Selected sources: OECD Private pensions outlook, 2008 and Pensions at a glance, 2009; IOPS, USA: pension system overview, 2009; Social Security

in the United States — an introduction, update as at

quarter 2013, June 2013

United States


Contacts

Graeme McKenzieGlobal Pension Leader

Uschi SchreiberGlobal Markets Leader, Global Government and Public Sector Leader

Josef Pilger

Michael E. PattilloUS Government and Public Sector Pension Co-Leader

US Government and Public Sector Pension Co-Leader

+1 732 516 4225

Christopher RahamUS Pension Leader, Financial Services

European Pension Leader

EY |

About EY

advisory services. The insights and quality services we

EY’s Global Wealth & Asset Management Center can help your business The global wealth and asset management sector has

evolving regulatory environment and changing client base.

Management Center brings together a worldwide team

ey.com/wealthassetmgmt

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