My 6 Key Takeaways from Retirement Systems Across the Globe
By Josh Cohen
Over the last 18 months, I have been exploring the origins and evolution of the employer-based retirement system through my podcast, The Accidental Plan Sponsor, where I seek out and listen to the stories of individuals who have shaped and influenced the system. The focus of my second season was to gain a better understanding of how other countries across the globe have tackled the challenges of building a retirement system, looking specifically at Chile, Australia, United Kingdom, and Singapore.
Six key themes emerged after digging deeper into these respective systems.
- Funded, account-based defined contribution (DC) systems are the future. We are not going back to defined benefit (DB) pensions. Pay-as-you-go retirement systems and DB pension systems are out of favor across the globe. Low-interest rates, increased longevity, and a more mobile workforce means employers do not want to be on the hook to pay lifetime benefits for retirees. And increasingly, workers want transparency regarding what is theirs, and having an account earmarked just for them provides that comfort. Now, that does not mean these accounts cannot have professional management and products that provide a lifetime benefit, but I see the arc of retirement plans moving in a direction where the promise is more on the contribution going in, not the benefit coming out.
- In the U.S., the debate between a voluntary system versus mandates and compulsion will need to be resolved. We have a coverage gap issue in this country — our voluntary system leaves tens of millions of Americans without a workplace savings plan. Every country I studied this season has moved to a system where there are more mandates to offer plans. For example, in Australia, it is mandatory that all workers contribute to a retirement plan. In the UK, all employers must offer a plan and automatically enroll their members. Individuals can opt out, but most do not. The day is coming in the U.S. when we will have to address this once and for all.
- A robust social safety net is necessary for any system to work. As I have come to learn, systems that do not provide safety for residents who may fall through the cracks without building sufficient retirement savings will have problems. Sometimes that happens when retirement savings are predicated on contributing through the workforce, but some folks do not spend a full career in the formal economy. Chile is a country dealing with this right now. Many Americans, particularly those in lower-income quartiles, rely heavily or entirely on our Social Security system for their retirement income. If we are going to evolve our systems in the U.S., we cannot forget the important role Social Security plays to provide credibility and trust in any retirement system going forward.
- The need for professional and institutional investments is very important. I like systems such as those in Australia and Singapore that find ways to invest assets institutionally. Saving for retirement is a long-term proposition. If run professionally by someone with scale and resources, retirement savings can be invested in diversified and even illiquid assets that provide additional return opportunities on behalf of those for whom the assets are invested. For various reasons, investments in DC plans in the U.S. are still pretty simple relative to how, for example, superannuation funds in Australia are run. When thinking about how to organize a retirement system, I think it is really important that it be set up in a way that allows for this type of professional management.
- Everyone, and I mean everyone, is still trying to figure out retirement income. Just about every country I looked at admitted they have not quite figured out how to help individuals in the decumulation phase. This becomes the inevitable challenge when you move to a DC system. Of the countries that I studied, Singapore has done the best job in this area. They require that a certain amount of your account be used to buy a government annuity. This is a reminder that we need to do a lot more work to embed income solutions into retirement plans.
- Finding that right balance between the role of government, the private sector, and employers is key. If there is one theme that emerged across all four countries I studied and guests I have interviewed, it was the clear shift away from employers taking on the role of plan sponsor. Chile created Pension Fund Administrators (AFPs), which are privately run retirement providers. In Australia, their retirement providers are called superannuation funds. Similarly, in the UK, retirement benefits are increasingly being provided by private entities called master trusts that serve multiple employers. The one exception is NEST, a retirement plan that was launched by the UK government. In Singapore, the government runs the entire program.
Uncovering insights to help us find the right balance between government, private sector, and employee involvement is the focus of The Accidental Plan Sponsor Season Two, Part Two. As you know from the Georgetown CRI, some U.S. states are creating retirement plans for workers who reside in their respective states. Some have suggested that the federal government create one big plan that all workers can contribute to. We now have some structures called pooled employer plans (PEPs), that are privately run and similar to the UK master trusts or Australian superannuation funds.
As I look across the globe, it seems inevitable that the U.S. will move to some combination of these different types of plans and away from the employer-based model, but which plans we go to and how we get there is not quite clear. Finding that balance with the other five key takeaways I mentioned will be critical.
I welcome you to tune in to catch up on old episodes and join me for the second half of the season coming this fall, where all this and more will be discussed.
Josh Cohen, CFA, is a Managing Director and the Head of Client Solutions for PGIM DC Solutions.
PGIM is a supporter of the Center for Retirement Initiatives. The views and opinions expressed in this blog post are the views of the author and do not reflect any policy or position of the Center for Retirement Initiatives.
July 2022, 22-04
Angela Antonelli and Christopher Mungiello, 2021 Policy Innovation Forum Report | Securing a Reliable Income in Retirement: Is It Possible to Build a 21st-Century Personal Pension? Georgetown Center for Retirement Initiatives, June 2022.
Organization for Economic Co-operation and Development (OECD), Recommendation of the Council for the Good Design of Defined Contribution Pension Plans, OECD/LEGAL/0467, February 22, 2022.
PGIM, Retirement Income Beliefs: A Roadmap to Optimal Solutions, November 15, 2021.