The panelists also called for the regulator to focus on essential features such as scale, tax incentives, auto-enrolment, easy-to-understand default options and financial literacy for young people. In particular scale was deemed extremely important in improving efficiency of pension plans and allowing for further consolidation in sub-scale pension vehicles.
Pension design should reflect better risk management rather than avoidance of risk assets, say pensions experts
Speakers included Elizabeth Corley, Chief Executive of Allianz Global Investors Europe, Gordon L. Clark, Halford Mackinder Professor of Geography at the University of Oxford, Divyesh Hindocha, Senior Partner and the Global Director of Consulting for Mercer's investment consulting business, and Jeremy Cooper, Chairman Retirement Income at Australia’s Challenger Limited.
Risk of retirement income becoming an endangered species
Elizabeth Corley commented: "Individuals' expectations with regard to their state-sponsored pensions are shifting towards reality and we see substantial reform discussions going on throughout Europe. Retirement income will become an endangered species if we don’t have effective second and third pillar pensions."
"The success of an appropriate pension design should be measured by investment efficiency and the comfort it gives to its active members. People want to have protection against losses and against inflation. Any solution that cannot meet these expectations would be perceived as investing in a 'black box' and could lead to a further erosion of trust in the retirement system. This increasing inertia will then undermine it systematically."
Elizabeth Corley: "Individuals' expectations with regard to their state-sponsored pensions are shifting towards reality."
Diverse answers to financial markets challenges
Divyesh Hindocha said: "Although not universally the case, pension funds have maintained faith in growth assets but this is being tested, not only by financial markets, but also changes in the regulatory environment and prospective changes in accounting standards."
"In some markets governance capabilities have been boosted by the injection of more "professional" trustees or in some cases investors have established a framework to outsource many of the key investment decisions. Many investors have also recognised that risk premia are time varying and the utility of risk is related to funding health and therefore dynamic. Consequently they have incorporated this by either making their asset allocation decision dependent on market and funding level, as opposed to time, and allowing their investment managers more flexibility to manage market exposures"
Flexible institutions needed to accommodate diversity of behaviour amongst people
Gordon L. Clark said: "In light of global economic turmoil and the ageing of Western societies, it is more important than ever to strike a balance between social security and workplace pensions, especially given the disconnect between how much people save and their income aspirations for retirement. With the accelerating importance of Defined Contribution pension plans, it is vital that governments, employers and the financial services industry design pension savings institutions that can ameliorate behavioural biases thus allowing people to retire with adequate funding. These institutions also need to be flexible to accommodate the diversity of behaviour amongst people so that their aspirations may not be frustrated by overly rigid government policies. Many people find long-term saving a challenge; but, some are effective savers. The challenge is to design institutions that help cater for everyone’s aspirations."
"Risk and uncertainty challenge even the most sophisticated savers. It's not just a question of nudging people in the right direction; it's a question of designing pension institutions that can produce some certainty in outcomes and a value-for-money pension. Nudge can be a fudge if governments ignore the value-for-money proposition."
Discussion should be focussing on outcomes
Jeremy Cooper, the central figure behind Australia's latest "Stronger Super" pension reforms, highlighted: "Traditional legal thinking about trustees focuses too much on process and not on outcomes. Full transparency around outcomes is tantamount for a functioning retirement system."
"Prudential safety and governance are valid matters for regulation, but so is efficiency. This has to become a trustee governance issue. The MySuper reform originated from a DC product that is simple for the members, low cost and transparent. It works for most people and sets a benchmark for other products. With certain mandatory design features and possible, but not required choices, 8 out of 10 people are now enrolled in the default option. MySuper will also require trustees offering pension products to have a strategy for dealing with the risks that face all retirees: being market risk, inflation and longevity risk. Retirees need a bedrock of secure income in retirement – immunising the gap between the first pillar and their basic spending needs; something that most DC systems do not yet deliver adequately."
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