A majority of the global population does not participate in a retirement plan, a challenge which employers and governments will have to address in the years to come, according to a report from State Street.
“Even in the United States and the U.K., the world’s two largest occupational pension markets, roughly half of the workforce does not participate in a retirement plan,” says the Vision report. “Given that the world’s population is both rising and aging, much still needs to be done to address this inadequate coverage.”
Employers, governments, financial services providers and unions will all have a role to play in addressing the lack of pension plan participation, it says. The days of defined benefit (DB) plans are numbered as defined contribution (DC) plans grow in usage. “In many countries the impact of changing accounting rules and greater solvency requirements will lead to defined benefit plans closing to new members and gradually maturing.”
The report states that as funded retirement plans are expected to grow, the main issues in the future will be employee participation and informed investing. “Where there is an absence of compulsion or paternal care from governments, employers and fiduciary boards, individuals are challenged to make the best choice for themselves,” says the report. “Further evidence from established voluntary DC markets suggests that individuals who do invest often rely too heavily on default funds.” It suggests simple measures to address this such as offering more efficient default funds, which turn excessive caution from a disadvantage into an advantage.
As the trend continues towards DC plans, communication is identified as the single most important factor in deciding the success or failure of national pension strategies. “Communication in 21st century benefit provision is not an optional extra; it will prove the difference between prosperity and failure for some reforms,” says the report. “For those who remain reluctant in spite of the right messages, techniques such as auto-enrollment and auto-escalation of contributions together make a virtue of procrastination.”
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