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Risk. Reinsurance. Human Resources

The World of DC in 2015: A Global Analysis

March 2015

1 DC in 2015: a Global Update Aon | Empowering results

Speakers – Session 1

How to ask questions during the webinar

UK

Kevin Wesbroom [email protected]

Australia

Ashley Palmer [email protected]

US

Steve Shepherd [email protected]

International Chair

Colin Haines [email protected]

Welcome

Stewart Fotheringham [email protected]




UK

Sophia Singleton [email protected]

Welcome

Yvan Legris [email protected]

International Chair


US


Australia





Welcome

Paul Rangecroft [email protected]

International Chair


US


Australia


UK

Sophia Singleton [email protected]


Agenda

Country Updates – Legislation Update & Market Trends

UK

Australia

US

2

Questions 4

1 Introduction & Global Overview

3 Global DC Retirement Income Themes

Supporting members in complex decisions

What should the role of the employer be?


Agenda


UK

Australia

US

2

Questions 4






Pension funds are a dominant global market player

Source: OECD Global Pension Statistics, Global Insurance Statistics and Institutional Investors databases, and OECD staff estimates

Notes:

Book reserves are not included in this table. Pension funds and insurance companies' assets include assets invested in mutual funds, which may be also

counted in investment funds.

1. Other forms of institutional savings include foundations and endowment funds, non-pension fund money managed by banks,

private investment partnership and other forms of institutional investors.

0

5

10

15

20

25

30

1995 1997 1999 2001 2003 2005 2007 2009 2011

US

D tr

illi

on

s

Investment funds Insurance companies Pension funds Other (1)

$30.0 tn

$24.5 tn

$21.8 tn

$1.9 tn


DC market share of pension fund assets is significant and increasing

15.8

7.0

6.0

4.1 0.5

Pension Assets ($tn)

Pension Funds - DB Pension Funds - DCInvestment funds Insured contractsBook reserves

Source: OECD Pension Markets in Focus 2013, Aon analysis

19.4 7.1

3.3

3.1 0.5

Pension Assets ($tn)

USA Europe APAC Americas (excl US) Middle East & Africa


Global trends in DC

DC set to become and remain the dominant global retirement savings mechanism

Due to ageing populations, DC pension providers need to consider ways to ensure individuals have

adequate income during retirement

– The current economic environment compounds this problem

Many countries are reforming pension systems including:

– moves to DC

– increasing coverage (e.g., via compulsion, soft compulsion)

– improving security for pension savings

Younger generations are more likely than older generations to rely on company DC pensions

Good design (eg auto increases, investment options), effective communication and education are key tools

for the success of DC schemes

Source: OECD Pensions Outlook 2014, Aon Hewitt research

Significant implications for DC pension providers and employers


Agenda


UK

Australia

US

2

Questions 4





UK Update


Employers are starting to face significant workforce management challenges

DC and the new realities: less and later

Source: Aon DC Member Survey 2014

Expected retirement age

At what age do you expect to retire from all paid employment?

Expected pension

Relative to your salary, when you take your pension,

what level of pension do you expect to receive?


And now we’ve got “Freedom and Choice”

“It’s about trusting people with

their own money”

George Osborne

“George Osborne will give elderly

greater access to pension savings”

The Guardian

“Osborne's pensions 'freedom' will

be a long-term social disaster”

The Guardian

“2014 Budget: Pensions liberation

or disaster? ”

PIRC

Cash

Lump

Sum

Annuity

Income

drawdown

Mix ‘n’

match


What are members likely to do at retirement?

Will take the

money as

soon as

possible

Early spender

10%

Set aside

for

long-term

care or

bequest

Residual required

5%

Continue

to invest

and dip in

as and

when

Flexibility foremost

15%

Secure

guaranteed

income via an

annuity

Certainty-seeker

35%

Continue to

invest to

generate

stable income

Steady spender

35%


New developments

Employers’ Interest

Emerging realism of pensions adequacy poses workforce issues

Managing a DC workforce

Pension funds are to recruit, retain – and retire?

Emerging Area

How does lifestyle investment need to change

How to support members in the run up to, and after retirement –

guidance vs. advice.

New vehicles to deliver flexibilities

Increased Activity

Rapid innovation in the market

More pension scams!!

Threats to taxation


A flavour of EMEA

France:

Financing of top-hat

plans; increased

taxation on pension

contributions

Germany:

Move to Cash

balance and DC

(with guarantees); Change

to State Pension Age

Ireland:

Benefit design for high

earners; VAT

exemptions on

management services

for DC IORPs

Belgium:

Interest rate

guarantees;

Africa

Increasing focus on

retirement savings

Czech Republic

Elimination of second

pillar; Increased taxation

on saving withdrawals

Poland:

Nationalisation of Pillar II

funds; Jubilee DB to DC

plan conversions

Norway

DB to DC

conversions

Spain

Tax limits for pension

contributions reduced

Italy:

TFR contributions can

be paid in payroll

Netherlands:

Collective DC;

Compensation

for high earners

Middle East:

Financing of end of

service plans

Switzerland:

Proposals for individual

DC choice

Sweden

Pension charges and

collective plans

Australia Update


Evolving landscape in Australia

Source: APRA, June 2014

Fund type Number of funds Number of funds

Assets

(A$ billion)

Number of

accounts

(million)

June 1995 June 2014 June 2014 June 2014

Corporate 5,833 108 62 0.5

Industry 115 52 323 11.5

Retail 623 127 422 14.4

Public sector 85 38 257 3.3

Self-managed

(SMSF) etc. 95,033 531,742 559 1.0


Australia Insights

Superannuation is a differentiator and highest benefit spend after pay

for most organisations in Australia

Approximately 40% of the organisations pay Super above the

9.5% mandatory minimum Superannuation Guarantee (SG) rate

And even with the SG increasing eventually to 12%

approximately 40% of these organisations intend to remain ahead of the SG rate

Insurance is a differentiator too – but beware

Approximately 60% of the organisations pay insurance premiums in full or part for employees

Source: Aon Hewitt Superannuation and Insurance Pulse Survey Australia 2014


Systematic challenges

Account

based

products

Very small

market for

annuities

Lump sum

mentality

Relentless

legislative

change eroding

trust in system

Ageing

population


New developments

Employers’ Interest

How super is our super provider?

Independent Policy Committee assistance sought

Bringing employer sponsored benefits to life

SuperStream payroll readiness

Emerging Areas

Guaranteed income products and pooled longevity solutions

Objectives based advice

Significant increases to insurance premiums

Changes to Award requirements?

Increased Activity

Further transitions to MySuper

Revamped online and mobile tools and transactions

Direct investment options

De-risking and wind-up of legacy Defined Benefit plans


A flavour of Asia Pacific

Japan:

EPF wind-ups;

DB/DC conversions;

DC plan adequacy;

Employee engagement

China:

Enterprise Annuities;

Flexible benefits;

Savings plans

India:

Gratuity plan funding;

Employee education

Korea:

Bonus contributions;

DB/DC conversions

Australia:

MySuper;

SuperStream;

DB/DC conversions

Of the leading companies in China are

considering implementing flexible benefit

plans in the next 2 years 66%

Of companies in Korea with between 100 and

300 employees have completed the transition

from DB to DC; in particular, investment banks

have an increasing focus on the adoption of

bonus sacrifice DC schemes

30%

Of organisations surveyed in Australia have

either completed a review or are in the

process of completing a review of their

corporate superannuation and insured

benefit arrangements in light of MySuper

and insurance premium increases

62%

Singapore: non

Employer provision for

non-CPF foreign employees;

Financial wellness

US Update


The US retirement income market is rapidly evolving

Sponsors’ Interests

2015 study shows higher retirement income interest

Lower DB accruals and the risk of outliving one’s assets, prompt interest in

DC income solutions

Employers want to understand the market

Decision-making assistance sought

Emerging Areas

Middleware is becoming more prominent

First in-plan products emerged in 2005

Mass integration not seen yet

Target date integration key development

Increased Activity

Solutions coming to market more frequently

15+ current DC income market players*

Non-insurer solutions developing rapidly

First generation products revamped

* Excludes traditional income annuity providers


US Plan Sponsor topical views from our 2015 Hot Topics in Retirement survey

Retirement Income Solution Likelihood to Offer in 2015

3%

4%

5%

10%

9%

17%

12%

12%

23%

19%

26%

28%

35%

53%

0% 20% 40% 60% 80% 100%

Qualifying longevity annuity contract (QLAC) that permits an in-plan deferred annuity purchase

Ability to transfer assets to a defined benefit plan in order toreceive an annuity

Within the plan: Annuity or insurance products as part of thefund lineup

Facilitation to purchase annuities outside the plan

Within the plan: Managed payout funds

Within the plan: Professional management (managed accounts)with drawdown feature

Plan distribution option allowing participants to elect anautomatic payment from the plan over an extended period of

time

Online modeling tools or mobile apps to help participantsdetermine how much they can spend in retirement

Very Likely Action in 2015 Moderately Likely Action in 2015

Already

Offer

70%

35%

30%

12%

10%

7%

4%

1%


US Plan Sponsor barriers to adding retirement income solutions

Barriers are present but not Insurmountable for future implementation

Barriers / Impediments Major

Barrier

Minor

Barrier Not a Barrier

Operational or Administrative Concerns 43% 38% 19%

Waiting to See the Market Develop More 43% 30% 27%

Fiduciary Concerns 38% 36% 26%

Participant Utilization Concerns 37% 31% 32%

Cost Barriers 23% 23% 37%

Preference for Participants to Exit Plan 21% 11% 56%

Difficulty with Participant Communications 21% 34% 43%

Portability 14% 30% 56%

Note: Respondents could cite more than one barrier / impediment

Our 2015 Hot Topics in Retirement Survey identifies some plan sponsors

concerns with retirement income solutions


US Regulators seek to assist plan sponsors with retirement income

The US Government is not mandating solutions but providing needed guidance

Future Recent Past

2008:

DOL issues Fiduciary

Safe Harbor for

Selection of Annuity

Providers for Individual

Account (DC) plans

July 2014: Treasury Department issued final rules for

Qualified Longevity Annuity Contracts (aka QLAC’s)

In early 2015:

Expect additional

guidance on

fiduciary issues with

annuities in

DC plans and

retirement income

on participant

statements

October 2014:Treasury Department issues notice

clarifying use of deferred annuities within a

Target Date Fund

October 2014: Society of Actuaries releases updated

mortality tables quantifying material increases in

life expectancy

December 2014: PBGC rules on treatment of

DC rollovers into DB plans


A flavour of the Americas

Brazil:

Trend towards 401(k)

style products, and

higher DC rates

Canada:

Governance; benefit

adequacy; decumulation;

government benefit

expansion; financial literacy;

vendor consolidation

Central America:

Limited pension

plan coverage

Mexico:

Tax limit reduction for employer

and employee contributions;

DB to DC/hybrid conversions;

Termination Indemnity as

minimum retirement benefit

70% of multinationals provide

a pension plan in Mexico

From 2011-2011, 70% of

new plans had a DC component

70%

Average social security

replacement ratio in Mexico 40%


Agenda


UK

Australia

US

2

Questions 4





Supporting Members in

Complex Decisions


Each country is different

Country Lifetime Annuities Income Drawdown Lump Sums

Australia Allowed, but very little demand Allowed. Main options are account-

based income streams Allowed and relatively common

New Zealand Allowed, but there are no annuity

providers in New Zealand Allowed Allowed and relatively common

USA Allowed, but demand is weak. 9% of

retirees have significant annuity income Allowed Allowed

Canada Allowed, with significant demand Allowed, although with restrictions

in some cases Limited for DC pension schemes

Ireland

Required, unless income can be shown

to the above threshold to qualify for

income drawdown

Allowed given sufficient income

Restricted to 25% or 1.5 times

income as tax-free lump sum

(taken by most people)

Switzerland Default option, and subsidised Not allowed Allowed, but discouraged

Denmark Unlimited deferred annuities Restricted amounts can be

allocated to term annuities Allowed

Netherlands Mandatory Not Allowed Not Allowed

Singapore Mandatory Not Allowed Not Allowed

Chile Default Option Restricted to ‘programmed

withdrawals’ Not Allowed

UK Formerly primary option. Allowed

Currently restricted to ‘capped

drawdown’ and ‘flexible drawdown’’

products.’

25% tax-free, taken by most

people. Expected policy is for

whole pot to be available, taxed at

marginal income tax rates after

25% tax-free allowance

Source: UK Financial Conduct Authority: The Retirement Income market – comparative global research


Supporting members into and through retirement – UK Research

The provision of advice

Who would you prefer to help you make the right decisions when you retire?

Trustees and employers are having to fill the gap between guidance and advice


What is the future of financial advice – Australia experience

Only 20% of Australians have ever accessed financial advice

They rated the advice experience 5 out of 10

They were on average age 51 years

Those that had NOT sought advice rated their financial expertise as 4 out of 10

86% of Gen Y and 76% of Gen X said they were likely or very likely to access advice online

39% of Australians felt they did NOT have enough money to make financial advice worthwhile

The average Statement of Advice is 30 pages

Guide me – don’t advise me

Source: Investment Trends Advice and Limited Advice Report, FPA


39% 47%

56% 69%

2014

Online Investment Guidance Phone Access to Financial Planners

Managed Accounts

35%

53%

44% 49%

2015 2014 2015

2014 2015 2014 2015

Online Third-Party Advice

18% are very likely to add in 2015 13% are very likely to add in 2015

10% are very likely to add in 2015 9% are very likely to add in 2015

Source: 2015 Aon Hewitt Hot Topics in Retirement

Plan Sponsors helping Plan Participants – U.S. Research

The Role of the Employer


Aon Corporate Governance of Employee Benefits Study 2012

89% of multinationals said it is important

to have corporate oversight of retirement

benefits in international locations

– But only 45% are satisfied with the

current level of oversight (compared

to 86% satisfaction for retirement

benefits in the head office location)

53% said that they do not have an

effective operating model for executing

strategic decisions on benefits

– Less than 50% companies said

career development, rewards and

work environment benefits are

important in international locations

Multinationals have an opportunity to

consider the role that DC retirement

plans (and associated financial wellness

benefit programs) have in reward

strategy in international locations; and

how best to manage these plans

40%

51%

42%

32%

32%

18%

20%

11%

6%

30%

21%

13%

11%

3%

9%

4%

3%

5%

24%

18%

28%

38%

44%

35%

43%

33%

36%

7%

10%

16%

19%

21%

38%

34%

53%

53%

36%

45%

42%

40%

41%

30%

38%

35%

36%

17%

10%

18%

22%

21%

12%

24%

12%

24%

40%

39%

34%

35%

31%

46%

31%

40%

34%

7%

6%

6%

4%

7%

12%

6%

13%

5%

40%

51%

42%

32%

32%

18%

20%

11%

6%

30%

21%

13%

11%

3%

9%

4%

3%

5%

24%

18%

28%

38%

44%

35%

43%

33%

36%

7%

10%

16%

19%

21%

38%

34%

53%

53%

36%

45%

42%

40%

41%

30%

38%

35%

36%

17%

10%

18%

22%

21%

12%

24%

12%

24%

40%

39%

34%

35%

31%

46%

31%

40%

34%

7%

6%

6%

4%

7%

12%

6%

13%

5%

Importance and satisfaction of

corporate oversight in Home

Importance and satisfaction of corporate

oversight in International Locations

Not important ImportantModerately important Very important

Not satisfied SatisfiedSomewhat satisfied Very satisfied

34%

47%

34%

22%

25%

13%

15%

7%

6%

40%

14%

10%

32%

6%

7%

10%

4%

4%

20%

27%

38%

30%

45%

33%

24%

30%

18%

6%

12%

18%

16%

24%

47%

52%

59%

73%

16%

25%

24%

14%

8%

12%

10%

15%

10%

5%

3%

7%

5%

4%

5%

4%

5%

4%

59%

53%

53%

54%

42%

50%

40%

47%

34%

20%

19%

16%

27%

46%

33%

46%

32%

53%

34%

47%

34%

22%

25%

13%

15%

7%

6%

40%

14%

10%

32%

6%

7%

10%

4%

4%

20%

27%

38%

30%

45%

33%

24%

30%

18%

6%

12%

18%

16%

24%

47%

52%

59%

73%

16%

25%

24%

14%

8%

12%

10%

15%

10%

5%

3%

7%

5%

4%

5%

4%

5%

4%

59%

53%

53%

54%

42%

50%

40%

47%

34%

20%

19%

16%

27%

46%

33%

46%

32%

53%

Retirement benefits

Work

environment

benefits (e.g.

paid time off,

meals)

Career development

and rewards

Retirement benefits

Work

environment

benefits (e.g.

paid time off,

meals)

Career development

and rewards


The role of the global employer – the multinational perspective

Benefit

Design

Check design against benchmarks, legislative requirements and corporate policies

Consider assessing retirement income adequacy (especially for plans that have

undergone significant changes)

Start thinking about what to do with employees who can’t afford to retire

Financial

Review DC investment strategies (especially defaults and for different

decumulation options)

Check competitiveness of charges and fees

Review use of different types of investments (active vs passive; unit-linked vs with-

profits/guaranteed return)

Operational

Review global/local policies, and extent these are actively followed

Review local processes and employer fiduciary role

Assess adequacy and suitability of employee information/advice/guidance

Check plans managed efficiently and effectively (and by individuals with

appropriate experience)

Global employers should the decide on the split of activity between

local offices and global/regional teams

Closing Remarks


Closing remarks

Global DC assets are growing rapidly – $7tn

Increased global focus on retirement adequacy

Legislative changes around the world

UK: Pensions freedom: change and innovation: workforce planning

Australia: Huge market changes; guidance not advice; yet more

legislation; risk of erosion of trust

US: Rapid evolution in retirement income market; overcoming barriers;

US regulatory assistance

Multinationals: global governance challenges


Aon’s Global DC Thought Leadership – Click to Link Through

http://www.aon.com/unitedkingdom/defined-contribution/dc-global-thought-leadership.jsp


Aon Global DC Footprint

Risk & HR Solutions

DC Mastertrusts in UK, USA, South

Africa, Australia, New Zealand, Belgium

(pan-Euro). Preferential terms with

preferred insurers in a number of

countries

Administer benefits for more than 23

million participants around the globe,

with $2 billion in DC payments monthly

Investment consulting services for

$4.2 trillion in assets globally

Pay and benefits survey data

covering 180 countries, more than

2,550 positions and more than

5 million incumbents

Place more than $110 billion of

premium flow

Aon presence in over 120 countries

with more than 66,000 employees

in 500 offices


About Aon Hewitt

Aon Hewitt is the global leader in human resource consulting and outsourcing solutions. The company partners with organisations to solve their most

complex benefits, talent and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates and

administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies.

With more than 30,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients

and their employees.

© 2015 Aon Hewitt Limited

Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority.

Registered in England & Wales.

Registered No: 4396810.

Registered Office:

8 Devonshire Square, London EC2M 4PL.

www.aonhewitt.co.uk

Our Next Global DC Webcast

DC Investment Themes,

New product Innovation and Global DC Governance

Dates in June/July 2015

Risk. Reinsurance. Human Resources

The world of DC in 2015: a global analysis

March 2015

the world of dc in 2015: a global analysis - · pdf filethe world of dc in 2015: a global...

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