The World of DC in 2015: A Global Analysis

Transcription

1 The World of DC in 2015: A Global Analysis March 2015 Risk. Reinsurance. Human Resources

2 Speakers Session 1 Welcome Stewart Fotheringham Stewart.fotheringham@aonhewitt.com International Chair Colin Haines Colin.haines@aonhewitt.com UK Kevin Wesbroom Kevin.wesbroom@aonhewitt.com Australia Ashley Palmer Ashley.j.palmer@aonhewitt.com How to ask questions during the webinar US Steve Shepherd Steve.shepherd@aonhewitt.com 1 DC in 2015: a Global Update

3 Speakers Session 2 Welcome Yvan Legris Yvan.legris@aonhewitt.com International Chair Colin Haines Colin.haines@aonhewitt.com UK Sophia Singleton Sophia.singleton@aonhewitt.com Australia Ashley Palmer Ashley.j.palmer@aonhewitt.com How to ask questions during the webinar US Steve Shepherd Steve.shepherd@aonhewitt.com 2 DC in 2015: a Global Update

4 Speakers Session 3 Welcome Paul Rangecroft Paul.rangecroft@aonhewitt.com International Chair Colin Haines Colin.haines@aonhewitt.com UK Sophia Singleton Sophia.singleton@aonhewitt.com Australia Ashley Palmer Ashley.j.palmer@aonhewitt.com How to ask questions during the webinar US Steve Shepherd Steve.shepherd@aonhewitt.com 3 DC in 2015: a Global Update

5 Agenda 1 Introduction & Global Overview 2 3 Country Updates Legislation Update & Market Trends UK Australia US Global DC Retirement Income Themes Supporting members in complex decisions What should the role of the employer be? 4 Questions 4 DC in 2015: a Global Update

6 Agenda 1 Introduction & Global Overview 2 3 Country Updates Legislation Update & Market Trends UK Australia US Global DC Retirement Income Themes Supporting members in complex decisions What should the role of the employer be? 4 Questions 5 DC in 2015: a Global Update

7 USD trillions Pension funds are a dominant global market player Investment funds Insurance companies Pension funds Other (1) 30 $30.0 tn 25 $24.5 tn 20 $21.8 tn $1.9 tn Source: OECD Global Pension Statistics, Global Insurance Statistics and Institutional Investors databases, and OECD staff estimates Notes: Book reserves are not included in this table. Pension funds and insurance companies' assets include assets invested in mutual funds, which may be also counted in investment funds. 1. Other forms of institutional savings include foundations and endowment funds, non-pension fund money managed by banks, private investment partnership and other forms of institutional investors. 6 DC in 2015: a Global Update

8 DC market share of pension fund assets is significant and increasing Pension Assets ($tn) Pension Assets ($tn) USA Europe APAC Americas (excl US) Middle East & Africa 7.0 Pension Funds - DB Investment funds Book reserves Pension Funds - DC Insured contracts Source: OECD Pension Markets in Focus 2013, Aon analysis 7 DC in 2015: a Global Update

9 Global trends in DC DC set to become and remain the dominant global retirement savings mechanism Due to ageing populations, DC pension providers need to consider ways to ensure individuals have adequate income during retirement The current economic environment compounds this problem Many countries are reforming pension systems including: moves to DC increasing coverage (e.g., via compulsion, soft compulsion) improving security for pension savings Younger generations are more likely than older generations to rely on company DC pensions Good design (eg auto increases, investment options), effective communication and education are key tools for the success of DC schemes Source: OECD Pensions Outlook 2014, Aon Hewitt research Significant implications for DC pension providers and employers 8 DC in 2015: a Global Update

10 Agenda 1 Introduction & Global Overview 2 3 Country Updates Legislation Update & Market Trends UK Australia US Global DC Retirement Income Themes Supporting members in complex decisions What should the role of the employer be? 4 Questions 9 DC in 2015: a Global Update

11 UK Update

12 DC and the new realities: less and later Expected retirement age At what age do you expect to retire from all paid employment? Expected pension Relative to your salary, when you take your pension, what level of pension do you expect to receive? Source: Aon DC Member Survey 2014 Employers are starting to face significant workforce management challenges 11 DC in 2015: a Global Update

13 And now we ve got Freedom and Choice It s about trusting people with their own money George Osborne George Osborne will give elderly greater access to pension savings The Guardian Cash Lump Sum Income drawdown Annuity Mix n match Osborne's pensions 'freedom' will be a long-term social disaster The Guardian 2014 Budget: Pensions liberation or disaster? PIRC 12 DC in 2015: a Global Update

14 What are members likely to do at retirement? Early spender 10% Flexibility foremost 15% Steady spender 35% Will take the money as soon as possible Residual required 5% Continue to invest and dip in as and when Certainty-seeker 35% Continue to invest to generate stable income Set aside for long-term care or bequest Secure guaranteed income via an annuity 13 DC in 2015: a Global Update

15 New developments Employers Interest Emerging realism of pensions adequacy poses workforce issues Managing a DC workforce Pension funds are to recruit, retain and retire? Emerging Area How does lifestyle investment need to change How to support members in the run up to, and after retirement guidance vs. advice. New vehicles to deliver flexibilities Increased Activity Rapid innovation in the market More pension scams!! Threats to taxation 14 DC in 2015: a Global Update

16 A flavour of EMEA Africa Increasing focus on retirement savings Belgium: Interest rate guarantees; Czech Republic Elimination of second pillar; Increased taxation on saving withdrawals France: Financing of top-hat plans; increased taxation on pension contributions Germany: Move to Cash balance and DC (with guarantees); Change to State Pension Age Ireland: Benefit design for high earners; VAT exemptions on management services for DC IORPs Italy: TFR contributions can be paid in payroll Middle East: Financing of end of service plans Netherlands: Collective DC; Compensation for high earners Norway DB to DC conversions Poland: Nationalisation of Pillar II funds; Jubilee DB to DC plan conversions Spain Tax limits for pension contributions reduced Sweden Pension charges and collective plans Switzerland: Proposals for individual DC choice 15 DC in 2015: a Global Update

17 Australia Update

18 Evolving landscape in Australia Fund type Number of funds Number of funds Assets (A$ billion) Number of accounts (million) June 1995 June 2014 June 2014 June 2014 Corporate 5, Industry Retail Public sector Self-managed (SMSF) etc. 95, , Source: APRA, June DC in 2015: a Global Update

19 Australia Insights Superannuation is a differentiator and highest benefit spend after pay for most organisations in Australia Approximately 40% of the organisations pay Super above the 9.5% mandatory minimum Superannuation Guarantee (SG) rate And even with the SG increasing eventually to 12% approximately 40% of these organisations intend to remain ahead of the SG rate Insurance is a differentiator too but beware Approximately 60% of the organisations pay insurance premiums in full or part for employees Source: Aon Hewitt Superannuation and Insurance Pulse Survey Australia DC in 2015: a Global Update

20 Systematic challenges Account based products Lump sum mentality Ageing population Very small market for annuities Relentless legislative change eroding trust in system 19 DC in 2015: a Global Update

21 New developments Employers Interest How super is our super provider? Independent Policy Committee assistance sought Bringing employer sponsored benefits to life SuperStream payroll readiness Emerging Areas Guaranteed income products and pooled longevity solutions Objectives based advice Significant increases to insurance premiums Changes to Award requirements? Increased Activity Further transitions to MySuper Revamped online and mobile tools and transactions Direct investment options De-risking and wind-up of legacy Defined Benefit plans 20 DC in 2015: a Global Update

22 A flavour of Asia Pacific Korea: Bonus contributions; DB/DC conversions Japan: EPF wind-ups; DB/DC conversions; DC plan adequacy; Employee engagement 66% Of the leading companies in China are considering implementing flexible benefit plans in the next 2 years China: Enterprise Annuities; Flexible benefits; Savings plans India: Gratuity plan funding; Employee education 30% Of companies in Korea with between 100 and 300 employees have completed the transition from DB to DC; in particular, investment banks have an increasing focus on the adoption of bonus sacrifice DC schemes Singapore: non Employer provision for non-cpf foreign employees; Financial wellness Australia: MySuper; SuperStream; DB/DC conversions 62% Of organisations surveyed in Australia have either completed a review or are in the process of completing a review of their corporate superannuation and insured benefit arrangements in light of MySuper and insurance premium increases 21 DC in 2015: a Global Update

23 US Update

24 The US retirement income market is rapidly evolving Sponsors Interests 2015 study shows higher retirement income interest Lower DB accruals and the risk of outliving one s assets, prompt interest in DC income solutions Employers want to understand the market Decision-making assistance sought Emerging Areas Middleware is becoming more prominent First in-plan products emerged in 2005 Mass integration not seen yet Target date integration key development Increased Activity Solutions coming to market more frequently 15+ current DC income market players* Non-insurer solutions developing rapidly First generation products revamped * Excludes traditional income annuity providers 23 DC in 2015: a Global Update

25 US Plan Sponsor topical views from our 2015 Hot Topics in Retirement survey Already Offer Retirement Income Solution Likelihood to Offer in % Online modeling tools or mobile apps to help participants determine how much they can spend in retirement 17% 53% 35% Plan distribution option allowing participants to elect an automatic payment from the plan over an extended period of time 9% 35% 30% Within the plan: Professional management (managed accounts) with drawdown feature 10% 28% 12% Within the plan: Managed payout funds 5% 26% 10% Facilitation to purchase annuities outside the plan 4% 19% 7% Within the plan: Annuity or insurance products as part of the fund lineup 3% 23% 4% 1% Ability to transfer assets to a defined benefit plan in order to receive an annuity Qualifying longevity annuity contract (QLAC) that permits an inplan deferred annuity purchase 12% 12% 0% 20% 40% 60% 80% 100% Very Likely Action in 2015 Moderately Likely Action in DC in 2015: a Global Update

26 US Plan Sponsor barriers to adding retirement income solutions Our 2015 Hot Topics in Retirement Survey identifies some plan sponsors concerns with retirement income solutions Barriers / Impediments Major Barrier Minor Barrier Not a Barrier Operational or Administrative Concerns 43% 38% 19% Waiting to See the Market Develop More 43% 30% 27% Fiduciary Concerns 38% 36% 26% Participant Utilization Concerns 37% 31% 32% Cost Barriers 23% 23% 37% Preference for Participants to Exit Plan 21% 11% 56% Difficulty with Participant Communications 21% 34% 43% Portability 14% 30% 56% Note: Respondents could cite more than one barrier / impediment Barriers are present but not Insurmountable for future implementation 25 DC in 2015: a Global Update

27 US Regulators seek to assist plan sponsors with retirement income Past 2008: DOL issues Fiduciary Safe Harbor for Selection of Annuity Providers for Individual Account (DC) plans Recent July 2014: Treasury Department issued final rules for Qualified Longevity Annuity Contracts (aka QLAC s) October 2014:Treasury Department issues notice clarifying use of deferred annuities within a Target Date Fund October 2014: Society of Actuaries releases updated mortality tables quantifying material increases in life expectancy Future In early 2015: Expect additional guidance on fiduciary issues with annuities in DC plans and retirement income on participant statements December 2014: PBGC rules on treatment of DC rollovers into DB plans The US Government is not mandating solutions but providing needed guidance 26 DC in 2015: a Global Update

28 A flavour of the Americas Canada: Governance; benefit adequacy; decumulation; government benefit expansion; financial literacy; vendor consolidation 70% 40% 70% of multinationals provide a pension plan in Mexico From , 70% of new plans had a DC component Average social security replacement ratio in Mexico Central America: Limited pension plan coverage Mexico: Tax limit reduction for employer and employee contributions; DB to DC/hybrid conversions; Termination Indemnity as minimum retirement benefit Brazil: Trend towards 401(k) style products, and higher DC rates 27 DC in 2015: a Global Update

29 Agenda 1 Introduction & Global Overview 2 3 Country Updates Legislation Update & Market Trends UK Australia US Global DC Retirement Income Themes Supporting members in complex decisions What should the role of the employer be? 4 Questions 28 DC in 2015: a Global Update

30 Supporting Members in Complex Decisions

31 Each country is different Country Lifetime Annuities Income Drawdown Lump Sums Australia New Zealand USA Canada Ireland Allowed, but very little demand Allowed, but there are no annuity providers in New Zealand Allowed, but demand is weak. 9% of retirees have significant annuity income Allowed, with significant demand Required, unless income can be shown to the above threshold to qualify for income drawdown Allowed. Main options are accountbased income streams Allowed Allowed Allowed, although with restrictions in some cases Allowed given sufficient income Allowed and relatively common Allowed and relatively common Allowed Limited for DC pension schemes Restricted to 25% or 1.5 times income as tax-free lump sum (taken by most people) Switzerland Default option, and subsidised Not allowed Allowed, but discouraged Denmark Unlimited deferred annuities Restricted amounts can be allocated to term annuities Allowed Netherlands Mandatory Not Allowed Not Allowed Singapore Mandatory Not Allowed Not Allowed Chile UK Default Option Formerly primary option. Allowed Source: UK Financial Conduct Authority: The Retirement Income market comparative global research Restricted to programmed withdrawals Currently restricted to capped drawdown and flexible drawdown products. Not Allowed 25% tax-free, taken by most people. Expected policy is for whole pot to be available, taxed at marginal income tax rates after 25% tax-free allowance 30 DC in 2015: a Global Update

32 Supporting members into and through retirement UK Research The provision of advice Who would you prefer to help you make the right decisions when you retire? Trustees and employers are having to fill the gap between guidance and advice 31 DC in 2015: a Global Update

33 What is the future of financial advice Australia experience Only 20% of Australians have ever accessed financial advice They rated the advice experience 5 out of 10 They were on average age 51 years Those that had NOT sought advice rated their financial expertise as 4 out of 10 86% of Gen Y and 76% of Gen X said they were likely or very likely to access advice online 39% of Australians felt they did NOT have enough money to make financial advice worthwhile The average Statement of Advice is 30 pages Source: Investment Trends Advice and Limited Advice Report, FPA Guide me don t advise me 32 DC in 2015: a Global Update

34 Plan Sponsors helping Plan Participants U.S. Research Online Investment Guidance 56% 69% Phone Access to Financial Planners 35% 53% % are very likely to add in % are very likely to add in 2015 Managed Accounts Online Third-Party Advice 39% 47% 44% 49% % are very likely to add in % are very likely to add in 2015 Source: 2015 Aon Hewitt Hot Topics in Retirement 33 DC in 2015: a Global Update

35 The Role of the Employer

36 4% 10% 40% 46% Aon Corporate Governance of Employee Benefits Study 5% % 7% 13% 33% 50% 47% 33% 89% of multinationals said it is important to have corporate oversight of retirement benefits in international locations But only 45% are satisfied with the current level of oversight (compared to 86% satisfaction for retirement benefits in the head office location) 53% said that they do not have an effective operating model for executing strategic decisions on benefits Less than 50% companies said career development, rewards and work environment benefits are important in international locations Multinationals have an opportunity to consider the role that DC retirement plans (and associated financial wellness benefit programs) have in reward strategy in international locations; and how best to manage these plans Retirement benefits Career development and rewards Work environment benefits (e.g. paid time off, meals) Retirement benefits Career development and rewards Work environment benefits (e.g. paid time off, meals) Importance and satisfaction of corporate oversight in Home 40% 34% 20% 6% 3% 7% 13% 33% 47% 32% 44% 21% Importance and satisfaction 5% 16% of 59% corporate 20% 21% 41% 5% 12% 31% 50% 7% 33% 21% 30% 24% 22% 24% 13% 18% 10% 24% Not important 14% 17% 12% 21% 40% 6% 32% 25% 5% 6% 40% 36% 4% 8% 51% 4% 34% 20% 45% 38% 7% 24% 40% 9% 18% Moderately 47% important 36% 30% 3% 25% Somewhat satisfied 32% 5% 16% 35 DC in 2015: a Global Update 11% 32% 22% 24% 14% 12% 10% 12% 12% 11% 3% 36% 22% 4% 6% 5% 14% 4% 3% 10% 11% 35% 34% 4% 7% 7% 4% 24% 5% 20% 15% 38% 47% 10% 15% 3% 9% 25% 18% 4% 10% 30% 42% 22% 3% 11% 42% 35% 14% 41% 34% 40% 4% 8% 5% 6% 42% 36% 34% 30% 18% 54% 34% 33% 40% 38% 30% 53% 47% 43% 31% 27% 12% 24% 35% 53% 40% 46% 45% 38% 36% 42% 35% 34% 30% 28% 33% 34% 40% 54% 18% 10% 38% 43% 39% 31% 53% 24% 7% 35% 27% Important 40% 12% 46% 53% Satisfied 44% 31% 6% 38% 35% 5% 16% oversight in International Locations Not satisfied 32% 32% 10% 6% 25% 20% 45% 59% 6% 4% 5% 16% 16% 6% 18% 6% 6% 7% 18% 38% Very 7% important 12% 19% Very satisfied 21% 4% 52% 24% 73% 27% 53% 53% 13% 59% 16% 32% 24% 19% 13% 19% 19% 38% 46% 12% 16% 46% 46% 27% 34% 53% 20% 53% 53% 34%

37 The role of the global employer the multinational perspective Benefit Design Financial Operational Check design against benchmarks, legislative requirements and corporate policies Consider assessing retirement income adequacy (especially for plans that have undergone significant changes) Start thinking about what to do with employees who can t afford to retire Review DC investment strategies (especially defaults and for different decumulation options) Check competitiveness of charges and fees Review use of different types of investments (active vs passive; unit-linked vs withprofits/guaranteed return) Review global/local policies, and extent these are actively followed Review local processes and employer fiduciary role Assess adequacy and suitability of employee information/advice/guidance Check plans managed efficiently and effectively (and by individuals with appropriate experience) Global employers should the decide on the split of activity between local offices and global/regional teams 36 DC in 2015: a Global Update

38 Closing Remarks

39 Closing remarks Global DC assets are growing rapidly $7tn Increased global focus on retirement adequacy Legislative changes around the world UK: Pensions freedom: change and innovation: workforce planning Australia: Huge market changes; guidance not advice; yet more legislation; risk of erosion of trust US: Rapid evolution in retirement income market; overcoming barriers; US regulatory assistance Multinationals: global governance challenges 38 DC in 2015: a Global Update

40 Aon s Global DC Thought Leadership Click to Link Through 39 DC in 2015: a Global Update

41 Aon Global DC Footprint Risk & HR Solutions DC Mastertrusts in UK, USA, South Africa, Australia, New Zealand, Belgium (pan-euro). Preferential terms with preferred insurers in a number of countries Administer benefits for more than 23 million participants around the globe, with $2 billion in DC payments monthly Investment consulting services for $4.2 trillion in assets globally Aon presence in over 120 countries with more than 66,000 employees in 500 offices Pay and benefits survey data covering 180 countries, more than 2,550 positions and more than 5 million incumbents Place more than $110 billion of premium flow 40 DC in 2015: a Global Update

42 Our Next Global DC Webcast DC Investment Themes, New product Innovation and Global DC Governance Dates in June/July 2015 About Aon Hewitt Aon Hewitt is the global leader in human resource consulting and outsourcing solutions. The company partners with organisations to solve their most complex benefits, talent and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates and administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies. With more than 30,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees Aon Hewitt Limited Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: Registered Office: 8 Devonshire Square, London EC2M 4PL DC in 2015: a Global Update

43 The world of DC in 2015: a global analysis March 2015 Risk. Reinsurance. Human Resources