Global Defined Contribution Insights | Q1.2021
Q1 2021
POV
EMEA
Americas
Asia-Pac
Ideas
ChartLand
POV
We are at the very earliest stage of the post-COVID era for the global economy, for capital markets, and for retirement finance.
History is clear that periods of innovation and creative destruction are often preceded by chaos and a collapse of the status quo. The next decade will be no exception.
As with the technology bubble (2000) and the global financial crisis (2008), COVID-triggered volatility (2020) we have entered more deeply into central bank dirigisme and private initiative, and the retreat of sovereign actors from crisis management.
In only a year of lockdown, we have radically altered everything – perhaps permanently. Fewer offices, atomization and centrifugal dispersion in the labor market and a radically simplified supply chain for goods, services and information have become the norm. (Amazon has obliterated every link in the chain –– from the factory in Vietnam to the kitchen table in Los Angeles, Paris or Dubai.)
Wealth inequality – growing steadily since the generational decline in interest rates that dawned in the nineteen-eighties, has exploded under lockdown. Amid a 2.5% contraction in U.S. GDP for 2020, the wealth of America’s 650 billionaires expanded by more than $1 trillion to $4 trillion – double the wealth of the lower half of the U.S. population.
Broad economic dislocation, unemployment and a ratcheting of government debt has accelerated judgement day for the world’s pay-as-you-go government pensions.
The great defined benefit pension powers – the U.S., Canada, UK and Netherlands – are migrating to defined contribution savings as rapidly as policy and markets will allow.
Which leaves the world at the dawn of a generation of defined contribution workplace savings that, if done right, will grow middle class savings for retirement, flow trillions worth of assets into growing capital markets and “cascade” wealth to downstream generations struggling to build their own middle class dreams.
DC savings is the financial Big Idea of the next generation.
EMEA
Netherlands, Denmark and Australia have been ranked the top-three pension systems in the world, by a new study by Mercer and Monash Business School of 37 retirement systems worldwide, covering nearly two-thirds of the world’s population. The study indexes 40 indicators in three principal clusters – adequacy, sustainability and integrity. The Netherlands’ $1.5 trillion system was named the best in the world, but lost to leaders in each of the three categories – Ireland for adequacy, Denmark for sustainability, and Finland for integrity. Netherlands has consistently held first or second place for ten out of the last eleven studies by Merer and Monash.
Netherlands moves closer to a DC savings system. The Dutch cabinet moved closer to a new agreement with employers, employees and unions that will see the country phase-out defined benefit arrangements by 2026. Following an initial "in principle" agreement in June 2019, talks over a new retirement legislation have progressed toward a new mandatory defined contribution system. The details of the system will be outlined in new legislation, which is expected to be in place by January 2022. The new legislation is expected to state that DB plan sponsors, which constitute over 80% of the Dutch market, will have four years to switch to a DC arrangement from DB. Consultants expect the new plans to be either pure DC or collective DC arrangements.
Younger generations in Europe could be working into their seventies as most European countries look set to increase the retirement age over the next decade, studies suggest. Research by the Finnish Centre for Pensions suggests that governments are adjusting the retirement age upward rather than reforming pension contributions or structures.
Germany: BRSG beyond the new DC plans. The new law to strengthen occupational pensions – the Betriebsrentenstärkungsgesetz (BRSG) – that came into effect in January 2018 contains several changes to second-pillar regulations. It adds further complexity as legal uncertainty remains with several new ways of doing things.
Will PEPP save Europe’s pensions and capital markets? The EU this year approved a Pan-European Personal Pension Product (PEPP) as part of the Capital Markets Union (CMU) agenda. Analysts wonder whether PEPP can establish a multi-trillion euro investment wave field by individual retirement savers. European Union households are amongst the highest savers in the world, with some $14 trillion held in bank accounts and insurance instruments paying minimal interest. And existing pension funds are sorely underfunded. For example, the U.K. has a $4 trillion retirement savings shortfall, projected to top $30 trillion by 2050.
Is PEPP the answer to Europe’s pension problem? This peer reviewed academic paper contains a description on the PEPP and its consumer protection elements, potential uses and its Level 2 measures. The Authors conclude that the PEPP can contribute to a high level of consumer protection, for example via limiting investment costs and providing detailed information.
The PEPP has been shorn of its original intent. The Personal European Pension Product (PEPP) has been watered down since it was propose. It was intended to generate large-scale portable, cost-efficient and simple long-term savings products that would be on offer alongside national pension product regimes. The final text on the proposal has become an insurance rather than a savings product as there is always a guaranteed element involved
Video: Conference on PEPPs from Better Finance (Brussels)
Tontines may be launched in European personal pension products by early 2021. Tontines, if properly structured, could be included in EU’s pan-European personal pension product (PEPP) system.
Europe needs a true pan-European occupational savings vehicle. The Pan-European Personal Pension Product (PEPP) will soon be operational, Multinational companies employing workers in different EU member states are already considering whether to offer PEPPs to their employees instead of traditional occupational pensions.
AMERICAS
Eight of Canada’s largest institutional investors – managing some $1.6 trillion in assets – have banded together in a call for more rigorous disclosures of environmental, social and governance factors, In an effort to promote sustainability and inclusion, they called for standardization of ESG disclosures.
Chile’s vaunted DC system faces an existential crisis. Chile’s celebrated $200bn private pensions system has served as a model for dozens of emerging markets since it was introduced in the 1980s. The system faces declining public support as populist politicians in the lower house of congress have voted to allow savers to withdraw another 10 percent of their savings, on the heels of a $17 billion wave of withdrawals in July.
ASIA-PAC
The case for guarantees for Australian Superannuation to 12 per cent should totally unravel during the next few months, following release of a new 648-page review of the retirement system.
If a scheduled rise in the Australian superannuation guarantee – from 9.5 per cent to 10 per cent from July 1 next year, and eventually to 12 per cent by 2025 – is blocked because of the COVID-19 recovery effort, Australian workers could retire with $200,000 less in assets.
Australia’s superannuation system has “worked”. In overview assessments of world pension markets, many believe that Australia, because of its mandatory superannuation savings program, is more prepared than almost any country
Superannuation reforms. Australian Senator Jane Hume, assistant minister for superannuation, financial services and financial technology in Australia’s Coalition government has unveiled the biggest reforms to the country’s A$3tn superannuation sector in decades. The shake-up aims at delivering A$18bn in savings for the nation’s 16m retirement savers who have been “let down” by poor performance and high fees.
China will become one of the most important markets for many European Managers. Chinese policymakers have prioritized defined contribution retirement savings and have abolished foreign ownership limits on Chinese financial services groups in an effort to attract global asset managers. New joint ventures have been launched that are majority owned by a non-Chinese partner.
Global asset managers entering China could help country’s beleaguered pensions system. China took a step towards market liberalisation earlier this year by removing limits on foreign companies owning funds businesses. Several international fund managers have entered the market or have applications pending. Global firms also hold major stakes in joint ventures with domestic firms, which make up more than a third of the 128 mutual fund houses in China China is the second largest economy in the world, after the US, but the country’s mutual funds hold only $2.2 trillion in AUM - only one tenth of the assets held in US funds.
Corporate retirement funds managed by South Korea’s major commercial banks posted poor returns in the first half of the year. Low yields have also drawn criticism from a lawmaker who stated that retirement pension funds managed by top commercial banks saw their yield rates hover at 1.69 percent on average.
IDEAS
The world’s defined benefit pension plans face a “perfect storm” once COVID-related protections from corporate insolvency are lifted next year, according to a study from Aon. The firm suggests that once protections are lifted, companies could face cash constraints and low interest rates that will increase pension deficits for schemes not fully hedged..
UK steps closer to introducing CDC pension schemes. The Pension Schemes Bill now moving through Parliament will enable the creation of a new breed of pension scheme. ‘Collective Defined Contribution’ schemes may offer members and employers a better balance between security and affordability.
CDC pensions could be 70% higher than DC and 40% more than DB, says WTW. For each £10,000 payable from an insured annuity bought with a DC pot, or £12,000 payable from a DB scheme, the CDC scheme would pay £17,000.
Willis Towers Watson CDC Report. A new type of pension provision coming to the UK.
Allianz Global Pension Report 2020: The Silver Swan. Analyzing 70 pension systems in terms of sustainability and adequacy, only a handful of countries have already made their pension system demography-proof, above all Sweden, Belgium, and Denmark.
CHARTLAND
Only a few of the world’s leading economies have accrued appreciable levels of retirement finance assets (whether defined benefit or defined contribution). Robust pension powers like Canada, the US and UK are letting DB pension funds diminish as a new generation of workers piles into DC savings plans. Netherlands is undertaking the tricky transformation of its DB funds into collective defined contribution structures.
Massive economies like France, Germany (and much of the rest of the EU) are only now getting around to developing funded pensions. Japan has the world’s single largest pension fund, but invests overwhelmingly in Japanese government debt (leading to shrinkage in assets under management over the 10-year period). China, so far, has minimal retirement finance assets.
This data suggests a massive opportunity for the growth of DC savings plans, local capital markets and global AUM.
JM3 PROJECTS is a California-based global consultancy providing intelligence & insight, public policy analysis, industry engagement, executive communications and thought leadership focused on global capital markets and emerging technologies. Leveraging a background in financial and diplomatic journalism, banking and asset management, we help our clients to understand the changing landscape, develop their preferred outcomes and build strategies and projects.
