Pension and retirement systems need rapid reform at a global level to meet demographic challenges

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The FINANCIAL — A new era of globalization is shaping pensions policy reform, challenging key industry assumptions and empowering consumers in their retirement decisions, according to EY’s new report: Building a better retirement world: insights for better outcomes in the global pension and retirement market.

For the report, EY conducted more than 80 interviews with pension- and retirement-related professionals, including policymakers, government regulators, public and private sector plans and product providers representing 18 countries across the Americas, Asia-Pacific and Europe. While policy reform is never easy, survey participants agreed that change is needed to rebalance pension and retirement systems. They identified these five key components that will lead a more robust pensions and retirement system across the globe: financial adequacy; financial sustainability; performance; efficiency and effectiveness; and political aspects.

EY has identified seven key areas that present opportunities for pension and retirement providers to help deliver social policy around pensions:

1. Need to rebalance benefit expectations with financial resources. The demographic transformation and existing pension and retirement system promises are creating a financial gap for consumers and opportunities and challenges for providers and governments. The global financial crisis acted as a catalyst, making concerns about funding long-term liabilities a major public policy issue that will only increase in the years to come.

2. Need for local financial markets to evolve concurrently with growth in pension assets. In many markets, pension and retirement assets are becoming a dominant component of local capital markets, stretching their capability and capacity. To maximize and balance outcomes, different levers in the local market need to evolve and better align to limit further stress.

3. Acceptance of 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 the annual gross domestic product. This pales in comparison to the level of regulation, supervision, governance and transparency in the insurance and banking world. This growing market and inherent risk to social and economic stability demands a new level of political, regulatory and public attention.

4. An increasing focus on operational excellence. Lackluster capital market returns have forced the pension industry to step up efforts to lower costs, improve customer delivery and service, and enhance risk management. These operational excellence initiatives come at a substantial cost and will require significant change in behavior, infrastructure and delivery systems. Overall, they will lead to a long overdue “industrialization” in this industry.

5. A recalibration of investment functions and investment management. The global financial crisis provided a wake-up call for systems and providers to reevaluate their investment strategy, asset allocation policy and operating models. Focusing on short-term results has been a challenge at a time when there is a shift from often underfunded defined benefits to defined contributions or unfunded pay-as-you-go promises.

6. Finding simplicity in complex systems. Low voluntary savings rates, low participation of young savers and low take-up or switching of voluntary solutions are indicative of a lack of engagement and understanding by ultimate plan beneficiaries. Improving buy-in, understanding and informed decision-making among members is vital to encourage informed action.

7. Need to connect and 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 customers what they want and improving the experience.

“The pension and retirement industry is becoming more global at an exceptional speed, especially on the policy and delivery front, which is impacting our government, public and private sector clients. The increasing importance of pension and retirement systems demands higher quality regulation, supervision, governance and transparency. Discipline, reasoning and hard decisions will be necessary to make the retirement world better, fairer and sustainable over the long term to address the financial impact of a global demographic transformation,” Graeme McKenzie, EY’s Global Pension Leader, said.

“In an uncertain environment, with many moving parts, much can be learned from global collaboration and the sharing of knowledge and experience. 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. In essence, we need to industrialize the policy reform process and the delivery,” Josef Pilger, EY’s Asia-Pacific Pension Leader, said.


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