This research report examines the structure and challenges of global private pension systems, emphasizing the impact of aging populations on retirement income and government budgets. It focuses on de-risking within private pension arrangements and makes recommendations to improve outcomes for future retirees.
Overview
The world’s population is ageing because of lower fertility rates and rising life expectancies. This will place significant pressure on many government budgets, with increasing pension, health care, and aged care costs. It is therefore inevitable that private pension provision will become more important in the decades to come. At the same time, companies are stepping away from employer-sponsored defined benefit (DB) pension plans, replacing them with defined contribution (DC) arrangements in which individuals bear all the risks.
This changing environment requires governments and the pension industry to seriously consider "de-risking" pension systems so that communities can have confidence in the future and individuals can look forward to a dignified retirement with financial well-being.
This study will consider ways to reduce the probability of the following scenarios:
- Poor investment returns from private pension plans, which reduce the adequacy of future retirement benefits
- Volatile investment returns, which can erode the community’s confidence in their future pensions
- Uncertain retirement outcomes created by DC systems and, in many countries, the need for individuals to make significant decisions at retirement
- Adverse retirement outcomes resulting from the many risks that individuals face during retirement
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Of course, the risks associated with private pension systems cannot be fully removed. Furthermore, no single approach will work in every country or market to uniformly reduce these probabilities. Every pension system has developed in its own way as a result of each country or market’s history, economy, culture, and social understanding.
Nevertheless, some key principles can be applied to every private pension system. These include the need for strong governance of every private pension plan, as well as clear and comprehensive legislation, together with an active pension regulator. These are fundamental requirements essential to providing the long-term confidence that individuals and households need as they look forward to their retirement.