Mercer Human Resource Consulting Limited is authorised and regulated by the Financial Services Authority Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU Deborah Cooper London, UK The payout phase of funded pensions Workshop on private pension provision – decumulation phase 7 September 2007
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The payout phase of funded pensions Workshop on private pension provision – decumulation phase
7 September 2007. The payout phase of funded pensions Workshop on private pension provision – decumulation phase. Deborah Cooper London, UK. The payout phase of funded pensions Agenda. Context Terms of reference What is being investi gated What we know already. - PowerPoint PPT Presentation
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Mercer Human Resource Consulting Limited is authorised and regulated by the Financial Services AuthorityRegistered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU
Deborah CooperLondon, UK
The payout phase of funded pensionsWorkshop on private pension provision – decumulation phase
7 September 2007
Mercer Human Resource Consulting 2
The payout phase of funded pensionsAgenda
Context
Terms of reference
What is being investigated
What we know already
Mercer Human Resource Consulting 3
The payout phase of funded pensionsAgenda
Context
Terms of reference
What is being investigated
What we know already
Mercer Human Resource Consulting 4
The payout phase of funded pensionsObjectives of pension saving
Sustainability
Adequacy
Modernisation
Mercer Human Resource Consulting 5
The payout phase of funded pensionsPensions vs poverty
Poverty threshold
Pillar 1 Comment
Cz 4660 960 minimum pension
De 9890 14110 average pension, full service
Ee 2870 2260 average pension, full service
Es 7040 6540 minimum pension
Ie 9000 10040 maximum flat rate
Pl 2880 1850 minimum pension
Sl 7050 8810 average pension, full service
Nl 9690 11950
UK 10650 6540 minimum, flat rate pension
Mercer Human Resource Consulting 6
The payout phase of funded pensionsPossible objectives of pension saving
1st pillar 2nd and 3rd pillars
Help redistribute between income groups and cohorts
Provide insurance in old age
Provide minimum income above a certain age
Provide ‘adequate’ income above a certain age
Reduce reliance on state
Assist individuals to distribute employment income over their adult lifetime
Contribute towards adequate incomes in retirement
Help maintain standard of living throughout lifetime
Mercer Human Resource Consulting 7
The payout phase of funded pensionsPension environment
Defined benefit provision replaced with defined contribution
Government provision replaced with employer provision
Employer provision replaced with private saving
– People living longer
– Working lifetimes getting proportionately shorter
– Measurements of adequacy - replacement ratios
Mercer Human Resource Consulting 8
The payout phase of funded pensionsAgenda
Context
Terms of reference
What is being investigated
What we know already
Mercer Human Resource Consulting 9
The payout phase of funded pensionsAims of investigation
To determine how sucessfully payout phase helps savers to achieve these aims
To consider whether there are obstacles
To consider whether markets or regulators could make it easier to achieve these aims
– Security vs. flexibility
Making use of international comparisons
Mercer Human Resource Consulting 10
The payout phase of funded pensionsNeed for regulation – does one size fit all?
state
state
state
private
private
private
Mercer Human Resource Consulting 11
The payout phase of funded pensionsAgenda
Context
Terms of reference
What is being investigated
What we know already
Mercer Human Resource Consulting 12
The payout phase of funded pensionsWhat is being investigated
Step 1:
Create an inventory of Member states pension markets including:
¯ Requirement for annuities
¯ Options for lump sums, drawdown, other forms of payment
¯ Indexation requirements
¯ Interaction between tax and social security regimes
Commentary on types of annuities, single, joint-life,
Mercer Human Resource Consulting 13
The payout phase of funded pensionsWhat is being investigated
Step 2:
Review of recent and anticipated market developments
Commentary on annuity form flexibility and pricing structures.
Analysis of risk management options
Analysis of information and advice available for provider choice.
Consideration of cross-border provision of annuity
Hurdles to greater availability and product development.
Commentary on other retirement saving vehicles, or other forms of saving products
Mercer Human Resource Consulting 14
The payout phase of funded pensionsAgenda
Context
Terms of reference
What is being investigated
What we know already
Mercer Human Resource Consulting 15
The payout phase of funded pensionsBehavioural economics
Individual savers on average are:– relatively unsophisticated
– have low levels of saving
People tend to be ‘optimistic’ when making savings decisions. They:– do not understand investments or investment risk
– ignore inflation
– underestimate their longevity
Mercer Human Resource Consulting 16
The payout phase of funded pensionsWork and Savings Survey – UK employees
85% of employees think planning for retirement is important– Only half feel confident they are doing enough to prepare
– Over a quarter worry that they do not know what to do
Only 20% of employees understand what an annuity is
52% of people believe they will receive a pension income (excluding state pension) in excess of 50% their salary– Average contributions to UK occupational DC schemes are
9%
– 2/3rds expect to retire at or before age 60
Mercer Human Resource Consulting 17
The payout phase of funded pensionsWorkPlace Survey – US employees
For 85% of employees, retirement is the most important reason for saving– For 24% of employees, not saving enough for retirement is
their biggest financial worry
65% think they are not saving enough for retirement– 53% worry that in retirement they will not be able to afford
health care
Mercer Human Resource Consulting 18
The payout phase of funded pensionsWhat we know already about provision - 1
Lifetime annuities most common– 1st pillar in annuity form, sometimes with partial lump sum
option
– 2nd, 3rd pillars more varied
Availability of lump sum tends to be– Related to size of first pillar
Countries with large 1st pillar more likely to permit lump sum
– Related to size of second pillar Countries with little 2nd and 3rd pillar provision more likely to
permit it to be taken as lump sum
– Related to size of fund Annuity requirement relaxed for small funds
Mercer Human Resource Consulting 19
The payout phase of funded pensionsWhat we know already about provision - 2
Sometimes:– Annuity indexed to prices
– Joint life annuities compulsory
– Some of risks borne by individuals are shared E.g. system takes some investment/inflation/longevity risk
Mercer Human Resource Consulting 20
The payout phase of funded pensionsInternational experience – three different regimes
USA France UK
Retirement age
65 60-65 65
Payment form
Lump sum Annuity with guarantee
Annuity
Participation rates 55-64
62.9% 43.6% 58.4%
Replacement ratios (gross)
41.2% 51.2% 30.8%
Questions
?
What is the purpose of 2nd and 3rd pillar retirement saving?
How permissive to you believe retirement regimes can be?
Should social security systems protect themselves from excessive drawdown?
Do annuity streams meet the consumption needs of people in retirement?