Retiring gracefully

13 Nov 14
Global pensions policies should be part of the solution, not part of the problem

By Josef Pilger | 12 November 2014

Global pensions policies should be part of the solution, not part of the problem

You’d think the fact that people are living longer would be cause for celebration. It is on many levels: who doesn’t relish the vision of a longer life? A rapidly increasing number of us will have a retirement that lasts as long as our careers. At the same time, retirees are healthier and better educated than in previous generations. But it’s not all good news.

For governments, the demographic earthquake holds serious implications for social, economic and pensions policies. With budgets stretched, and countries under threat of rating downgrades, how can they fund pension commitments and protect healthcare systems as citizens live longer? There are few easy answers.

Much of the debate continues to be shaped by the legacy of the global financial crisis. While economies struggle to shake off recession and address spending deficits, policymakers have been forced to confront the financial challenges of retirement. Governments are having to address the needs of baby boomers who expect their pensions to be paid. The time for kicking the can down the road is over. 

Although pension and retirement challenges have historically varied significantly within and between borders due to economic, social and political factors, there is general acceptance by industry experts, policymakers and governments of the need to rebalance pension and retirement systems in a fast-changing environment.

EY recently interviewed 80 pension and retirement professionals from 18 countries across the Americas, Asia-Pacific and Europe. Our report, Building a better retirement world, found that greater transparency and learning from international pension systems are likely to challenge key industry assumptions and empower citizens in their retirement decisions. 

Our study highlighted five key components that will lead to more robust pensions and retirement provision:

➊ Financial adequacy. How much will beneficiaries need for their financial wellbeing in retirement? How much will governments and employers need to provide in retirement benefits to attract and retain employees?

➋ Financial sustainability. How much can governments, private sector plan sponsors, public sector entities and future beneficiaries afford to save over the long term to pay for pension and retirement benefits?

➌ Performance. How can we maximise outcomes and predictability of investments?

➍ Efficiency and effectiveness. How can we deliver promises efficiently and effectively to all stakeholders while meeting their service expectations?

➎ Political aspects. What is our pension and retirement vision? What trade-offs must be made to secure political backing?

These five tenets apply to most countries, but their relevance varies around the world and over time. Note, though, that global similarities in underlying pension and retirement issues are increasing. Given the long lead time required to see the results of reform and the political sensitivity of tinkering with benefit levels, initiatives require timely action and change in manageable steps. Much can be learned through global collaboration. It will take diverse experience and capabilities in the assessment, decision and implementation phases of pension and retirement reforms to deliver truly sustainable retirement outcomes.

Many executives are combining domestic experience and market context with international insights to rebalance and refine retirement solutions. Stakeholders face challenges in emulating innovative solutions, identifying what has worked and why, and benchmarking data. Private and public sector pension providers are learning how to protect, improve or innovate their existing business, products and services or to reduce costs. Private sector providers want to know how to grow new business or enter new markets. We identified opportunities for pension and retirement providers to help deliver social policy:

⦁ Rebalance benefit expectations with financial resources. Demographic transformation and existing pension promises are creating a financial gap for consumers and opportunities and challenges for providers and governments. The global financial crisis made concerns about funding long-term liabilities a public policy issue that will only increase in the years ahead.

⦁ Accept a new level of regulation, supervision, governance and transparency. The pension and retirement industry in many countries is as large as the banking sector or annual GDP. This growing market and the risk to social and economic stability demands a new level of political, regulatory and public attention.

⦁ Increase focus on operational excellence. Lacklustre capital market returns have forced the pensions industry to step up efforts to cut costs, improve customer delivery and service, and enhance risk management. Operational initiatives come at a substantial cost and require significant change in behaviour, infrastructure and delivery systems. They will lead to long overdue 'industrialisation'.

⦁ Find simplicity in complex systems. Low voluntary savings rates, participation of young savers and take-up or switching of voluntary solutions are indicative of a lack of engagement and understanding by beneficiaries. Improving buy-in, understanding and informed decision-making among members is vital.

⦁ Become customer-centric. Through better customer engagement, governments and providers can influence persistency, reputation, understanding and action. Providers are seeing the value of pension and retirement systems as more than a balance of payments, assets, price and product features; instead, they are focusing on delivering to customers what they want and improving the experience. 

In a globalised world, there is no single response as systems operate in different contexts and levels of maturity. While pension and retirement challenges vary considerably, their increasing importance demands higher quality regulation, supervision, governance and transparency. 

Policymakers need to ask the right questions and take stock as failure to act now may lead to the closure of essential services for some and severely limited options for most to avoid harsh adjustments. Discipline, reasoning and hard decisions will be necessary to make the retirement world better, fairer and sustainable over the long term.

This article appears in the Winter 2014 issue of Public Finance International magazine

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