© 2012 Towers Watson. All rights reserved. The Future of Private Pension Plans January 22, 2013 Gene Wickes Global Director, Benefits Segment, Towers Watson
Feb 25, 2016
© 2012 Towers Watson. All rights reserved.
The Future of Private Pension PlansJanuary 22, 2013
Gene WickesGlobal Director, Benefits Segment, Towers Watson
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2
Overview
The backdrop Gaining economic momentum Favorable demographics, but for how long?
Retirement system choices The case for private pensions
Lessons from North America and Europe Outlook for Mexico and taking advantage of an opportunity
Where do we go from here?
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3
An emerging Mexican economy
Booming “middle class” in a changing Mexico “Mexico: A Middle Class Society, Poor No More, Developed Not Yet”
— Center of Research for Development, A.C. (CIDAC) and Woodrow Wilson International Center for Scholars, Mexico Institute
Key Highlights: Greater economic and financial stability (absence of widespread financial ruin) Dual-income families and more women in the workforce More highly educated and skilled workforce Increased home ownership and more sophisticated buyers (use of credit and
purchase of insurance products) Improvements in life expectancy and thus quality of life
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0.4%
0.7%
1.0%
1.1%
2.3%
2.5%
2.8%
2.9%
4.4%
6.1%China
India
Russian Federation
Brazil
Germany
Mexico
Canada
United States
France
United Kingdom
Compound annual growth in GDP per capitaBetween 2009 and 2011, constant dollars
4
Rebound in economic growth in Mexico outpaces its neighbors to the north
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5
Mexico’s economic growth has been fueled by the in-flow of foreign direct investment
$0
$5
$10
$15
$20
$25
$30
$35
1980 1985 1990 1995 2000 2005 2010
Source: The World Bank Group, World Development Indicators – WDI Online; United Nations Foreign Direct Investment (WIR 2012 data).
Bill
ions
of U
S D
olla
rs
Foreign direct investment in the Mexican Economy in Billions of US Dollars
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An emerging Mexican economy
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$3,627 $8,400
$11,640 $15,266
$32,644
$38,582
$48,112
GDP per Capita, 2011 (in current $, PPP)
World Average $11,594
Source: The World Bank Group, World Development Indicators – WDI Online; United Nations Foreign Direct Investment (WIR 2012 data).
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7
Linking demography to our economic prospects
Demography provides a window into many aspects of our economies Driving factor behind labor force growth Consumption and investment patterns Particular impact on public entitlement programs
Remarkable similarity in the demographic shifts in all countries Steep declines in fertility rates
Baby Booms primarily in U.S., Canada and Australia Stabilized in many developed countries today Sharp declines underway in many advancing economies (like Mexico)
Rapid improvement in life expectancy Infant mortality improves to low rates Followed by significant improvement in old age life expectancy
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8
Linking demography to our economic prospects
Mexico will age dramatically over the next 20 to 30 years Fertility rates are plummeting Tremendous improvements in life expectancy But Mexico today is entering a period of favorable demographics which
can help to drive economic growth – “Demographic Dividend” China has been in this period for the last twenty years but it will end by 2020
Rapid aging Mexico will age as rapidly in 40 to 50 years as most developed countries
including the US did in 200 years But can Mexico grow rich before it grows old? Demography is not destiny
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Fertility rates expected to dip below replacement in the near future
Source: United Nations, World Population Prospects, The 2010 Revision1950-1955
1955-1960
1960-1965
1965-1970
1970-1975
1975-1980
1980-1985
1985-1990
1990-1995
1995-2000
2000-2005
2005-2010
2010-2015
2015-2020
2020-2025
2025-2030
2030-2035
2035-2040
2040-2045
2045-2050
2050-20550
1
2
3
4
5
6
7
8
Mexico
Replacement Rate
Child
ren
per w
oman
Fertility in All Countries1950-1955 2010-2015
India 5.9 2.5 Mexico 6.7 2.2 United States 3.5 2.1 France 2.8 2.0 United Kingdom 2.2 1.9 Brazil 6.2 1.8 Canada 3.7 1.7 China 6.1 1.6 Russia 2.9 1.5 Germany 2.2 1.5
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Good news on life expectancy but this has created challenges for financing longer retirement periods
1950-1955 1975-1980 2000-2005 2010-2015 2025-2030 2050-20550
10
20
30
40
50
60
70
80
90
50.7
65.3
74.9 77.2 79.5 82.3
Year
s
Source: United Nations, World Population Prospects, The 2010 Revision
Life Expectancies of All Countries
1950-1955 2010-2015 Change France 67.3 81.7 14 Canada 69.0 81.2 12 Germany 67.5 80.6 13 United Kingdom 69.3 80.4 11 United States 68.6 78.8 10 Mexico 50.7 77.2 27 Brazil 50.9 74.0 23 China 44.6 73.8 29 Russia 64.5 69.2 5 India 37.9 66.0 28
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Can we continue to afford longer retirement periods?
Source: United Nations World Population Prospects, Extended Country Profiles.
1950-1955 1980-1985 2010-2015 2020-2025 2040-2045
France 13.6 16.6 20.8 21.6 23.0
Canada 13.8 16.4 20.1 20.8 22.3
Germany 13.5 15.5 19.3 20.3 21.8
UK 13.3 15.3 19.3 20.1 21.7
US 15.0 16.6 19.3 20.1 21.6
Mexico 12.1 15.7 18.4 19.2 20.6
China 8.7 13.9 15.5 16.5 18.1
Turkey 10.9 12.1 15.4 16.2 17.8
Russia 15.6 14.3 15.1 15.8 17.0
India 9.8 11.9 14.0 14.7 16.1
Life Expectancies at Retirement (Age 65)
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Mexico’s demographic dividend; taking advantage of favorable demographics
Source: United Nations, World Population Prospects, The 2010 Revision
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500
20,000
40,000
60,000
80,000
100,000
Working Age (20-64) and Dependent Populations (0-19 and 65+)
WorkingDependent
Thou
sand
s of
Peo
ple
Demographic Dividend
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Brazil’s demographic dividend
Source: United Nations, World Population Prospects, The 2010 Revision
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Working Age (20-64) and Dependent Populations (0-19 and 65+)
WorkingDependent
Thou
sand
s of
peo
ple
Demographic Dividend
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United States’ demographic dividend
Source: United Nations, World Population Prospects, The 2010 Revision
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 20500
50,000
100,000
150,000
200,000
250,000
Working Age (20-64) and Dependent Populations (0-19 and 65+)
WorkingDependent
Thou
sand
s of
peo
ple
Demographics are beginning to
work against the U.S.
Demographic Dividend
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China’s demographic dividend
Source: United Nations, World Population Prospects, The 2010 Revision
1950 1955 1960 1965 1970 1975 1980 198519901995 2000 200520102015 2020 2025 2030 2035 2040 2045 20500
200,000
400,000
600,000
800,000
1,000,000
Working Age (20-64) and Dependent Populations (0-19 and 65+)
WorkingDependent
Thou
sand
s of
peo
ple
The demographic peak for China is at the end of the current decade
Demographic Dividend
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Favorable demographics won’t last in Mexico
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 20500.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Ratio of 20-64 to 65+ year olds
Source: United Nations, World Population Prospects, The 2010 Revision
Old-Age Support Ratios of All Countries2010 2050
Brazil 7.0 2.0 Canada 3.5 1.5 China 6.8 1.7 France 2.7 1.5 Germany 2.4 1.1 India 9.8 3.8 Mexico 7.1 2.3 Russia 4.2 1.9 United Kingdom 2.8 1.6 United States 3.6 1.8
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Filling the gapRetirement system choices
17
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Retirement system choices Many countries base their retirement systems on a
combination: Public vs. Private designs Mandatory vs. Voluntary Funded vs. Pay-go Defined benefits vs. Defined contribution
Core questions every country must ask: How generous should our mandatory system be? How do we fill the gap left by the mandatory system? Who bears the risk and how do we manage disappointment?
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0
25
50
75
100
Wide range of generosity among global pension schemes
Gross pension replacement ratesPublic, mandatory schemes for average worker
19
Average: 57.3%
Source: OECD, Pensions at a Glance, 2011, p. 121.
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20
The retirement income picture in Mexico
0%
20%
40%
60%
80%
100%
0.50 0.75 1.00 1.25 1.50 1.75 2.00
Other sourcesSocial Security
Retirement income goal relative to earnings
Preretirement earnings level (multiple of average wage)
Many modern day analysts and retirement planners put target retirement income at around 70 to 80 percent of preretirement earnings for people to maintain living standards
Source: OECD Pensions at a Glance: Pension Calculator. http://www.oecd.org/els/socialpoliciesanddata/pensionsataglancepensioncalculator.htm.
Target Income GAP44% for AWW
Total Mandatory Pension Schemes
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21
The retirement income picture in the United States
0%
20%
40%
60%
80%
100%
0.50 0.75 1.00 1.25 1.50 1.75 2.00
Other sourcesSocial Security
Retirement income goal relative to earnings
Preretirement earnings level (multiple of average wage)
Many modern day analysts and retirement planners put target retirement income at around 70 to 80 percent of preretirement earnings for people to maintain living standards
Source: OECD Pensions at a Glance: Pension Calculator. http://www.oecd.org/els/socialpoliciesanddata/pensionsataglancepensioncalculator.htm.
Target Income GAP36% for AWW
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22
The retirement income picture in Chile
0%
20%
40%
60%
80%
100%
0.50 0.75 1.00 1.25 1.50 1.75 2.00
Other sourcesSocial Security
Retirement income goal relative to earnings
Preretirement earnings level (multiple of average wage)
Many modern day analysts and retirement planners put target retirement income at around 70 to 80 percent of preretirement earnings for people to maintain living standards
Source: OECD Pensions at a Glance: Pension Calculator. http://www.oecd.org/els/socialpoliciesanddata/pensionsataglancepensioncalculator.htm.
Target Income GAP30% for AWW
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Gross pension replacement rates for average wage workers at retirement age in various countries
Mandatory Mandatory Voluntarypublic private private Total
(percent) (percent) (percent) (percent)Austria 76.6 76.6Belgium 42.0 15.6 57.6Canada 38.9 30.8 69.7Greece 95.7 95.7Netherlands 29.2 58.9 88.1Spain 81.2 81.2Sweden 31.1 22.7 53.8United Kingdom 31.9 36.7 68.6United States 39.4 38.8 78.2Source: OECD, Pensions at a Glance, 2011, p. 121.
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Gross pension replacement rates for average wage workers at retirement age in various countries
Mandatory Mandatory Voluntarypublic private private Total
(percent) (percent) (percent) (percent)Australia 11.8 35.4 47.3Chile 3.2 41.7 44.9Denmark 28.9 50.7 79.7Estonia 25.5 22.5 48.0Hungary 44.4 31.4 75.8Israel 19.4 50.2 69.6Mexico 4.0 26.9 30.9Slovak Republic 26.0 31.6 57.5
Source: OECD, Pensions at a Glance, 2011, p. 121.
Countries with mandatory DC plans
How to fill the gap?
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Lessons on where we went wrongThe case for private pensions
25
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Evolving pensions in the developed economies
Largely defined benefit programs throughout the 20th Century Why DB?
Employers generally more paternalistic Companies increasingly worried about “hidden pensioner” issues and
incenting early retirement Demand by many union groups Money management and annuity efficiencies
DC programs were still evolving in most countries
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27
Unraveling of DB pensions in the developed economies
Three forces were increasing defined benefit liabilities during the 1980s and 1990s The baby boomers were settling into career jobs and average service in
plans was rising because of their relative share of the workforce The baby boomers were also aging toward retirement day and the power of
compound discounting was accelerating the growth of benefit obligations in present value terms
Interest rates were falling
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28
Unraveling of DB pensions in the developed economies
Three forces were increasing defined benefit liabilities during the 1980s and 1990s
Irrational exuberance about financial market performance gave the impression we could manage the systems on thin margins
Businesses don’t control their markets Highly publicized collapses E.g., Bethlehem Steel in the United States
Now, significant legacy obligations need to be financed off the backs of current workers, raising the cost of retirement
Global financial crisis magnified these challenges
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Options for dealing with increasing costs of retirement
Contribute more to the plans than we have been contributing Cut back on the generosity of benefit levels (at a time retirement is
even more in focus) Keep workers in the workforce longer
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Opportunity in MexicoThe case for private pensions
30
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Current landscape
1997 reforms increased the “gap” needed to supplement pension income from social security
But voluntary contributions in Mexico are low today Legal termination indemnity is the predominant scheme
Many multinationals and large domestic employers offer retirement plans Most are DB plans today but hybrids and DC on the rise
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69% 66% 62% 60% 56% 58%
11% 12% 13% 13%10% 9%
18% 20% 22% 25% 27% 34% 33%
72%
10%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012
-12DB
HybridDCDB
Evolving Mexican private pension plans
All Registered PlansBy Plan Type
32
Source: CONSAR, October 2012.
Number of plans 1,629 1,702 1,793 1,809 1,832 1,946 2,002
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68%51%
37%21%
54%
5%
10%15%
25%
9%
7%27%
39% 48% 54%37%
92%
1%
0%
20%
40%
60%
80%
100%
Before1996
1996-2000
2001-2005
2006-2010
2011 2012
Y ax
is la
bel
HybridDCDB
Companies increasingly adopt hybrid and DC plansNewly Registered PlansBy Plan Type
33
Source: CONSAR, October 2012.
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34
Looking ahead
Recent regulatory changes could create opportunity Accounting standards require accrual methods Revenue ruling on tax deductibility of company contributions to DC plans
Tax advantages increase as household income climbs Growing demand from employees in post-global crisis world
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Growing demand for retirement security
EMPLOYEE ATTITUDES
Russia
China
Mexico
Brazil
India
Japan
France
Germany
UK
US
Canada
40%
47%
53%
63%
67%
32%
51%
55%
60%
67%
68%
30%
25%
26%
22%
22%
39%
20%
28%
19%
19%
17%
29%
28%
21%
15%
11%
29%
29%
17%
20%
15%
15%
Retirement security more important issue over last three years
Agree Mixed DisagreeSource: Towers Watson 2012 Global Workforce Study.
Developed economies
Fast-growing economies
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Employee willingness to pay for guaranteed retirement benefit
Russia
Mexico
Brazil
China
India
Japan
France
Germany
UK
US
Canada
34%
65%
68%
73%
78%
28%
47%
48%
59%
59%
60%
33%
20%
19%
21%
17%
42%
20%
31%
25%
27%
25%
33%
16%
13%
6%
5%
30%
33%
21%
16%
15%
15%
Willing to pay a higher amount from paycheck each month to ensure guaranteed retirement benefit
Agree Mixed DisagreeSource: Towers Watson 2012 Global Workforce Study.
Developed economies
Fast-growing economies
EMPLOYEE ATTITUDES
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Sometimes we forget what we are trying to achieve Goals
Employers’ goals are primarily related to workforce management Workers’ goal is to have a period later in life when lifestyle needs are
met through means other than selling own human capital Social goal is to provide retirement income security across the broad
cross section of society
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No plan
Retirement plan
No plan
Retirement plan
No plan
Retirement plan
No plan
Retirement plan
50%
77%
50%
68%
31%
17%
46%
58%
23%
15%
22%
14%
25%
21%
25%
23%
26%
8%
27%
18%
44%
62%
29%
19%
Retirement plans support attraction & retention goals
My organization does a good job of hiring highly qualified employees
Source: Towers Watson 2012 Global Workforce Study — Mexico.
Likely to leave employer in next two years
Prefer to remain with current employer, even if comparable job available elsewhere
Would like to work with current employer until retirement
Agree Mixed Disagree
EMPLOYEE ATTITUDES
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No plan
Retirement plan
No plan
Retirement plan
42%
67%
39%
69%
26%
22%
24%
19%
32%
11%
37%
12%
EVP and sustainable engagement
39
My organization does a good job living up to the employee value proposition
Source: Towers Watson 2012 Global Workforce Study — Mexico.
My organization has a reputation for providing a good employee value proposition Agree Mixed Disagree
Highly Engaged: Those who score high on all three aspects of sustainable engagement
Unsupported: Those who are traditionally engaged, but lack enablement and/or energy
Detached: Those who feel enabled and/or energized, but lack a sense of traditional engagement
Disengaged: Those who score low on all three aspects of sustainable engagement
67%
20%
5%7%
Retirement plan
48%22%
17%13%
No plan
Sustainable Engagement
EMPLOYEE ATTITUDES
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Where do we go from here?Closing remarks
40
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Where do we go from here? Need to rescale the retirement system to provide basics without
impoverishing the future Give those able to work longer the incentives to do so without
harming those who cannot Must acknowledge that defined contribution savings are a critical
part of retirement security Must provide an attractive and efficient means to convert these
benefits into dependable lifetime support Social insurance should remain a backstop but will likely be less
bountiful than today
41
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Sometimes we forget what we are trying to achieve Goals
Employers’ goals are primarily workforce management Workers’ goal is to have a period later in life when lifestyle needs are
met through means other than selling own human capital Social goal is to provide retirement income security across the broad
cross section of society Constraints
Need for labor inputs to produce the goods and services to satisfy society wants
Need for workers to retain sufficient share of productivity to be adequately rewarded for inputs
Cost levels and management
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One closing reminder Pensions evolved because of the mutual benefit provided
to employers and workers Employers had to worry about “hidden pensioners” Workers had to worry about having adequate income to
meet economic needs beyond careers Policymakers worried about a vulnerable segment of
society Evidence that pensions are still relevant in the “knowledge
economy”