How can we improve retirement outcomes for future generations of workers in America? In the second season of my podcast series, “The Accidental Plan Sponsor,” which explores the origins, development, and trends in employer-based retirement systems, I looked for lessons from abroad—examining the systems of Chile, Australia, the United Kingdom, and Singapore. Although each country’s model is unique, six key themes have emerged that should inform where American policy can go next:
1. Funded account-based defined contribution systems are where the retirement world is headed. Lower interest rates, increased longevity of plan participants and a more mobile workforce means companies don’t want to be on the hook to pay lifetime benefits for retirees. Internationally, we see no wavering of the trend toward defined contribution plans—even governments like Singapore, and to some extent, Chile, are replacing their Social Security systems with a pay-as-you-go system with an account-based system like the United States. The change means that workers have more transparency in their investments and the flexibility to make their own allocations, but what is then also needed is more professional management of assets and products that provide lifelong income.
2. The debate of a voluntary system versus a mandated system will have to be resolved. Our voluntary system leaves tens of millions of Americans without a retirement savings plan. And for those who do have access, we only see robust participation if a plan sponsor voluntarily implements auto-enrollment. Every country I’ve studied has moved to a system where having a retirement plan is mostly required. In Australia, it is mandatory for all workers to contribute to a retirement plan. In the UK, all employers must offer a plan and automatically enroll their members. Individuals can choose, but most do not. While some US states are beginning to require this for most companies in their jurisdiction, the day will come when the entire country will have to deal with the coverage once and for all.
3. A robust social safety net is necessary for any system to function. Some people do not spend a full career in the formal economy, and systems that do not provide for residents without sufficient retirement savings will have problems. While Chile had a much-admired system, now many of their citizens are reaching retirement with meager account balances, and the country does not have a robust social safety net to help them. While the US Social Security system is not perfect, many Americans rely heavily or entirely on Social Security for their retirement income. We cannot forget the important role this plays in giving credibility and trust to any pension system.
4. The need for professional and institutional investments is essential. Saving for retirement is a long-term proposition. If managed professionally, retirement savings can be invested in diversified—and even illiquid—assets that can provide additional return opportunities. Systems such as the trust funds in Australia and the Central Provident Fund in Singapore are finding ways to invest assets institutionally. For various reasons, investment portfolios in DC plans in the US are still quite simple. When you’re thinking about how to organize a retirement system, it’s really important that it’s set up in a way that allows for more advanced, professional management and access to alternative asset classes.
5. Everyone is still trying to figure out retirement income. This becomes the inevitable challenge when you transition from a defined benefit system to a DC system. If everyone has their own pot of money, how can they make sure it lasts a lifetime? The country that did the best job among the ones I looked at is Singapore. They require a certain amount from your account to be spent on a government annuity. While this may be difficult to implement in the United States, much more work can be done to embed retirement income solutions, including guaranteed solutions, into retirement plans.
6. Striking that right balance between the role of government, the private sector and employers is the trick. It’s the question behind the podcast—who should play the role of the plan sponsor? Guests from all four countries I examined told me that large employers, even the government, are moving away from providing pensions, let alone any benefits. So others needed to step up. In Chile, they created pension fund managers or privately managed retirement providers. In Australia, trust funds – many owned by for-profit companies or entities called “pro-members”, originally created to serve the workers of specific industries – compete for business by providing good investments, good service and reasonable fees. Similarly, in the UK, retirement benefits are increasingly provided by private “masters” who serve multiple employers. Singapore is a little different—there, the government runs the entire program. From looking around the world, it seems inevitable that the United States will move toward some combination of these types of plans and away from the employer-based model.
What will work for America is not yet entirely clear, but by looking beyond our borders, we can see a whole new world of possibilities—essential to the ongoing work to secure retirement for future generations.
Josh Cohen, CFA, is Head of Client Solutions, PGIM DC Solutions. For more information, visit https://www.pgim.com/defined-contribution-US
