Pension funds, asset managers and consultants excel at taking in the big picture of liabilities and assets. Given that occupational pensions traditionally rest on large-scale collective or company arrangements, it is perhaps unsurprising that this kind of thinking prevails – with uniform contribution rates and retirement dates that often benefit employers and payroll departments.
In many cases these frameworks were designed for a labour market that no longer exists or were designed in the best interest of the collective. In the Netherlands, as the country struggles to move on from its uniform pension system, there is an understandable desire to maintain the best aspects of traditional, collective DB as individual approaches are embraced.
Some benefits of individualisation of pensions have been overstated, as Sweden’s experience in the 2000s with its premium pension system shows. Behavioural economics provides ample evidence about savings activity that can be extrapolated across social groups and countries, and a recent Netspar literature review by Lisa Brüggen and Thomas Post encapsulates its main conclusion in its title: ‘More Choice Does Not Necessarily Lead to Greater Pension Involvement’.
One conclusion from the literature is that no amount of financial education is going to make individuals spend more time than they need to on long-term financial planning. And individuals clearly don’t seem to want to spend too much time thinking far into the future.
Pensions are also complicated. The 2013 Nobel prizewinner Richard Thaler has observed that for many people, being asked to solve their retirement planning problems is akin to being asked to build their own car.
As defined contribution (DC) pensions gain ground, it will not only become increasingly important to get the default options right. Pension providers will also need to think creatively about engaging individuals at key points, without losing sight of their strengths in asset allocation and liability management.
Target-date funds make little sense unless the individual has a clear idea of their retirement date and their investment horizon.
The good news is that a new generation of research is emerging to provide practical underpinning to individual retirement systems, such as the living standards replacement rate as conceived by Dr Bonnie-Jeanne MacDonald.
And organisations like Pensions-Europe or the recently established Cross-Border Benefits Alliance can share thinking between trustees, corporates, asset managers and insurers.
As DC takes root, successful pension organisations of the future will need to adapt their thinking to accommodate different working patterns and styles, and will put the individual at the centre of their thinking wherever possible.