Retirement solutions - The global perspective

Overview

Recognising the importance of the next stage of the Retirement Income Covenant and the sentiments behind Noble prize winner William Sharpe’s infamous quote that decumulation is the ‘nastiest, hardest problem in finance’, JANA recently conducted a retirement focused research trip across leading European jurisdictions – the UK, Denmark, the Netherlands and Germany. The below article shares key learnings and insights from the trip.

Setting the scene

Chris Beattie (Senior Consultant) and David Scollon (Senior Consultant) conducted a retirement focused research trip across the UK and Europe. The trip spanned two weeks where they visited close to 30 firms in London, Edinburgh, Copenhagen, Amsterdam, Rotterdam, The Hague, Frankfurt and Munich. The pair met with a combination of pension funds, asset managers, master trusts and asset consultants.

The objective of the trip was to examine the following:

• What has and hasn’t worked in different retirement systems globally and what are the learnings for Australia?
• Understand the frameworks that asset owners and product providers have used to determine the structure of products to launch.
• Research into asset allocation approaches for decumulation versus accumulation products.
• Ultimately, how JANA can continue to evolve our advice for clients for the Retirement phase.

Key takeaways

• There is no silver bullet when it comes to retirement solutions. Solving the retirement problem is complex with no perfect answer and what works in one system might not work in another. The best theoretical solution needs to match the practical realities of human behaviour, affordability, the ability to implement (initial set up and ongoing) and regulatory risk etc.
• The history of a country’s pension system and the prevalence of a state pension underpin hugely impacts behaviour and culture with respect to saving for retirement. UK members, used to a Defined Benefit (DB) system with a guaranteed state pension, are disengaged on Defined Contribution (DC) and default to societal norms such as taking cash lump sums whether it’s appropriate or not.
• Behavioural change is hard but necessary. Pension behavioural change seems to be easier where there is higher trust in the government and the pension system. This was more apparent in the Danish and Dutch systems where there are relatively high levels of trust and a willingness to pool longevity risk. The Australian system is positioned somewhere between the UK and Danish systems.
• Many overseas solutions de-risk the asset allocation “to and through” retirement. At the point of retirement, there is still a material allocation to growth assets acknowledging that a more de-risked portfolio at retirement may be sub optimal for member outcomes over the full decumulation phase. The Danish and Dutch pension funds have material allocations to listed equities and unlisted assets at the start of the decumulation phase.

Different retirement solutions

We encountered a number of different decumulation solutions on our trip. The solutions can be broadly split into the following four categories outlined in the table below.

The opportunity in Australia and next steps

We believe Australia is well placed to tackle the retirement problem. Australia doesn’t typically have to deal with the headwinds associated with transitioning from a DB system to a DC system and Australians are generally more engaged given the established DC system where the risk sits with the member.

In addition, super funds generally have the scale and expertise to build and launch new products for their members as evidenced by many launching sustainability focused products over the past decade.

At JANA we have been working on a framework to assist Trustees of super funds in assessing their retirement product offering, across a range of quantitative and qualitative factors. We have developed key metrics to assist Trustees in assessing their retirement offering across a range of outcomes (including expected income, income longevity, income stability and flexibility). We have expanded our modelling to include different decumulation solutions in our framework. We note that there are a range of other solutions, such as bucketing solutions, that we didn’t encounter on the research trip but are factored into this analysis.

We have also recently completed a retirement questionnaire of product providers in the Australian market, which is contained in a separate Spark article, click below to read more.

The Australian Perspective – Navigating the next stage of retirement product design

Please contact the JANA Retirement Team (retirementresearch@jana.com.au) or your JANA Consultant if you wish to discuss further.