Abstract
AbstractThe move from defined benefit to defined contribution (DC) has transferred the longevity and investment risks from the plan sponsor to the individual plan member. Without the actuarial cross-subsidies implied by pooling these risks, the danger of outliving one’s savings is significant. Much attention has been focussed on pre-retirement investment design but less on post-retirement. In most countries, the post-retirement systems in place are insufficient to solve this challenge for small asset sizes or small proportions of individuals’ retirement accounts. However, a number of DC markets are mature, such as Australia and Chile, and the principles of a solution that works for all must be identified. This paper researches a number of post-retirement systems around the world and identifies ten key factors that contribute to post-retirement solution design. These factors can result in an inconsistency between countries regarding the most appropriate post-retirement solution. Additionally, a disconnect is apparent between what retirees need and want in post-retirement. Successful post-retirement solutions will inevitably blend investment and insurance components in a balanced manner. With lengthening life expectancies, research supports strategies that blend a growth and income account-based approach for the first 15–20 years after retirement with longevity protection in later life.
Highlights
The impetus for our research into this topic was the observation that post-retirement solutions vary significantly from country to country even though the people living in those countries are generally facing the same risks.There are many complex issues involved in post-retirement solutions: insufficient savings; low bond rates in many countries; lack of financial knowledge; opaque products; changing regulations; varying savings patterns; inconsistent fiduciary liability; short-term political pressure; and the role of the state as a safety net, to highlight just a few
In Australia, in addition to some regulatory barriers that restrict the availability of annuities, one of the key impediments to the take-up rate is that the initial tax treatment of deferred lifetime annuities is penal compared to that applied to investment earnings on superannuation assets supporting retirement income streams
In many studies we reviewed as part of this research, “simplicity” was stated as one of the cornerstones of post-retirement solution design and while we agree with the sentiment behind this idea, we question whether simplicity in itself is the answer or if some straightforward guidelines on suitable solutions for retirees makes more sense
Summary
The impetus for our research into this topic was the observation that post-retirement solutions vary significantly from country to country even though the people living in those countries are generally facing the same risks. There are many complex issues involved in post-retirement solutions: insufficient savings; low bond rates in many countries; lack of financial knowledge; opaque products; changing regulations; varying savings patterns; inconsistent fiduciary liability; short-term political pressure; and the role of the state as a safety net, to highlight just a few. The issue of not having enough to live on is most likely to be solved by increased savings rates before retirement. The majority of people globally have not saved, and are not saving, enough for their retirement, especially given improving life expectancies (The Defined Ambition Working Party, 2014). Individuals, and plan sponsors on their behalf, must increase contributions and invest in assets generating returns above inflation in order to aim for a satisfactory target portfolio value by retirement
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