Deflecting the Global Wave of Retirement Unreadiness

Ed Farrington points to a February Time magazine cover—the picture of an infant, headlined: “This baby could live to be 142 years old.” That the baby looks worried may be incidental, but with longevity well outpacing saving around the globe, many countries have recognized they need to make adjustments—and some have begun.

Farrington, executive vice president, retirement, for Natixis in Boston, believes some countries will avoid the crisis in retirement unpreparedness, particularly those in Northern Europe that have modernized their health care systems. In fact, he ranks an economy’s health expenditures right up with its savings programs to predict how it will fare and, at least, for the industrialized West, bridge the gap between the worlds of defined benefit and defined contribution.

For many countries, such as those in Asia, though—even Australia, a model of success by superannuation—the problem looms larger than any solution now in place. How are these countries—and those of Northern Europe, for that matter—tackling the situation, and what might the U.S. learn from their efforts? Also, what can plan sponsors take from the discussion?

One common theme is raising the retirement age. Arthur Noonan, senior consultant and actuary, at Mercer, cites Denmark in particular for taking this step. While some countries such as the U.S. have upped the age to a fixed number, Denmark took a more fluid approach, linking age and eligibility to life expectancy. Sixty-five today, the state pension age will climb six months a year, from 2024 through 2027, to 67. “If life expectancy continues to improve as it’s been doing, they’ll automatically raise the eligibility age,” he says.

Denmark was the only nation to receive an “A” on the 2014 Melbourne Mercer Global Pension Index, for its “first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity.” To thank is the country’s “good minimum pension—about 34% of the average wage—compared with less than 20% in the U.S.” says index author David Knox, senior partner, and national leader (for Australia) for Mercer’s research practice. “It has great coverage within the system with virtually all workers covered; the level of assets exceeds 150% of GDP [gross domestic product]; the level of mandatory contributions [to private-sector, employer-driven plans] is more than 12%. In short, everybody is in, a good level of contributions is being set aside now, and [with the help of the public scheme and a means-tested supplement,] the poor are well-protected.” 

Another global survey, Natixis’ 2015 Global Retirement Index, placed Denmark seventh out of 150 countries, versus Mercer’s 25. Still, the top 10% of each were similar, dominated by Northern Europe and Australia.

Australia has garnered world renown for its superannuation system. The state has adopted other measures, the most promising being MySuper products, says Yoon Ng, Asian research director for Cerulli. These funds are a range of low-cost, simple—often passive—investments to replace sponsors’ old default option. “The biggest impact will be on fees,” she says. “The average fee was 2% before the introduction of MySuper funds, and the government expects to bring the fee down to 1.0%.”

Also, employers must contribute more to their workers’ Superannuation Guarantee (SG)—similar to an employer match. Whereas they paid in 9% of their employees’ salary in 2013, they now pay 9.5% and will pay 10% in 2025.

Hong Kong, like Australia, is introducing core funds—often low-cost passive instruments—to act as the default option, she says, while Singapore is hiking the Central Provident Fund (CPF) minimum sum, the amount that must be kept in the state’s CPF system for annuitization when an individual reaches 55. Set at $80,000 in 2003, the amount should rise to $161,000 this year. “This will mean fewer lump-sum payouts upon retirement and a greater focus on income streams,” Ng says.

In general, Asia will lighten its regulatory load, sources say, and one segment of the retirement industry to gain will be retirement insurance. “Retirement insurance refers to insurance companies focused on providing retirement solutions. This is rather common in Asia as insurance is a very common and important tool for retirement planning,” Ng says.

Another part of Asia has birthed a program showing exceptional promise, says Farrington: New Zealand’s KiwiSaver—particularly because it takes on the future. He attributes much of the West’s retirement unreadiness to “the shift from a defined benefit to a defined contribution world”—to Baby Boomers’ expectation of a retirement like their parents and inadequate education along the way to apprize them of otherwise.

KiwiSaver automatically enrolls all New Zealanders when they start to work—even those younger than 18, if their parents consent, he says. Employers contribute a mandatory match and, as the employee may opt out, the government offers a $1,000 incentive to stay invested.

“That is a long-term play,” he says. “OK, we may have a shortfall right now; we can try and tackle that, isolate that, try and put provisions in place around health care and catch-up schemes. But in the long run, we need to solve the problem in a more permanent way by getting young people to invest early and incent them and make it easy for them to do it.”

Clearly, a second common theme is state compulsion—an idea that meets resistance in the U.S. “I don’t think the U.S. has an appetite for mandatory,” Noonan observes. Auto-enrollment is a third. In Denmark, 90% are covered by private-sector finance,” he says. “In the U.S., I’d say 50% are covered by private plans.”

Like Denmark, “[The U.S. could] ensure that all workers are putting aside some money now for their future retirement, and that this money can’t be accessed for other purposes before retirement,” Knox says. “The contributions can be made by the employer, the employee or a combination.”

Mercer’s index, which ranked the U.S. No. 13, with a C (Natixis ranked it 19), makes specific recommendations, including “raise the minimum pension; … reduce pre-retirement leakage of funds from the system before retirement; … and introduce a requirement that part of the benefit must be taken as an income stream.”

The Natixis index found countries that seem well-prepared to deal with the retirement crisis have put their fiscal houses in order.  No. 2 Norway, for example, cut its level of government debt, relative to its gross domestic product; that has strengthened its finances and will free future resources to take care of retirees. Likewise, Iceland steadied itself after its banking system cratered.

In countries with high levels of debt and aging populations, governments will have to make tough choices about public spending, Farrington says. Those decisions could have a big, possibly detrimental, effect on retirees if benefits are cut severely. Or, maybe, the costs will be passed on to younger generations if government aid goes untouched.

Countries like Australia and New Zealand have systems that engage government, employers and individuals in the task of setting aside money for retirement. In the long term, nations whose people and institutions share the burden might be in the best shape, Farrington notes.

Whatever policy changes may lie ahead, plan sponsors can still exert control where they have it. “You can do things like auto-enroll, auto-escalate; you can make sure you’ve done proper diligence on creating the best investment menu possible,” Farrington says.

“Do we wish more of these things were compulsory? Yes, but the plan sponsor can take a look at … all the data available throughout the world on what systems are winning and just take pieces of them that work. They can employ those in their plan, today.”

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