One of the things that led us to set up Nest Insight was a desire to engage with, and learn from, the international discussion around retirement saving and retirement systems. The UK’s automatic enrolment policy was built on the foundations laid in systems like the US, Australia and New Zealand, and has in turn provided new lessons back to those systems and served as an example around which other countries have developed reforms. We’ve engaged in this international dialogue and exchange of ideas through participation in events in the UK, Europe, North and South America and Australia; through our partnership with the Aspen Institute’s Financial Security Programme in the US; and last year held our inaugural global defined contribution (DC) discussion forum with Aspen FSP and the International Centre for Pensions Management, bringing together practitioners, policy-makers and academics from the global DC community.
A growing reliance on individual saving through defined contribution plans
All retirement systems are different and reforms to those systems, if done well, will recognise the path dependency inherent in their design. There’s no single model for what the ‘best’ system might look like. But that doesn’t mean parallels can’t be drawn. One trend that is clear across many systems is the growing reliance on individual saving through defined contribution (DC) plans to fund a significant element of retirement. Systems built on defined benefit occupational plans have seen those plans eroded by rising longevity, the global investment outlook and a desire on the part of employers to remove at least some of the risks associated with providing pensions to their workers from their balance sheets. The same longevity rises have also challenged the fiscal sustainability of those systems traditionally more predicated on ‘pay as you go’ public retirement benefits. Starting in very different places, systems of both types have turned to individual DC as a part of the solution.
The rise of a ‘pillar 2.5’?
Much of the debate around retirement system design has used the World Bank’s ‘five pillars’ model as a classification scheme to explain the different components systems could draw on to meet the two main goals of a retirement system – poverty alleviation and income replacement. Yet the rise of individual DC doesn’t always neatly fit this model, falling to some extent between pillars 2 and 3, with elements of compulsion mixed in with greater freedom of individual choice, control and access. You could therefore think of this new breed of systems as incorporating a sort of ‘pillar 2.5’ – a loose grouping of workplace DC-led reforms which I’ve also heard referred to as ‘Universal Workplace Savings’ models. (I first heard this phrase in a discussion with John Mitchem, who I know had been discussing the idea and what it encompassed with Lisa Massena – so it’s with thanks to them that I’m borrowing it for my own purposes here!).
Commonalities and points of difference
I’m a fully paid up pensions geek going back to my early days as a civil servant in the UK Government. As I’ve encountered these different systems and ways of describing them, I’ve been curious about what the commonalities and points of difference were between them. How ‘universal’ had they managed to be? Were they universal in terms of actual participation, or only of access to a plan at work? Did changes to encourage universality focus on demand-side or supply-side interventions, or both? What was the role of employers now they were no longer the providers of a balance sheet to bear some of the risks associated with providing pensions? How far were these even really ‘pensions’ systems anymore, vs retirement savings accounts or even just savings accounts?
Sharing insights to drive positive changes
Today we’re publishing the paper I wrote as a result of this curiosity. It is not comprehensive – it ignores many systems that would enrich the comparisons, and I’m sure characterises the ones that are discussed in ways not everyone would always agree with. I hope to add to it over time as my own knowledge and understanding grows. In the meantime, hopefully it will prompt thought and discussion about how these systems work and how they could be improved, drawing on lessons from one another whilst respecting the cultural and structural differences that create that path dependency that I already mentioned. If you’re reading it and you’d like to discuss it or respond, please get in touch. Here’s hoping that when we emerge from this lockdown (which I almost managed not to mention), there will be opportunities and platforms for us to get together and continue the dialogue that’s already helped bring about significant positive changes in global retirement policy.
Will Sandbrook, Executive Director of Nest Insight