Collaboration improves pension benefits - report
GLOBAL - Pension fund boards may be able to deliver improved returns and lower costs if they collaborate with other, larger, parties to provide enhance benefits over time, and if they apply governance structures with higher expertise, claims a report examining pensions and healthcare regimes across the world.
The study was conducted by the World Economic Forum, assisted largely by Mercer and the Organisation for Economic Cooperation and Development (OECD), to provide insight into the pensions and healthcare regimes of the world, and demonstrate how parties might work together to improve life for ageing populations.
Within the 80-page document, officials flagged PensPlan's appointment of APG as an asset manager as one way in which Italian pension funds were seeking to improve the performance of Italian pension funds in terms of risk management and control, asset pooling and fiduciary management.
At the same time, the WEF report quoted research conducted by Ambachtsheer, Capelle and Lum in 2007, which showed the difference in operating costs between small and large pension funds can be as much as 1% of assets under management, and argued "estimates show good governance leading to one or two percentage point gains in net investment returns per year".
More specifically, an investigation of Irish pensions funds found those with fewer than 50 members carry operating costs worth 3.6% of funds under management, in contrast to 0.3% for funds with more than 500 members. And looking at the Netherlands, the WEF quoted research which suggested funds with fewer than 100 members have costs of 0.59% compared with 0.07% for funds with more than one million members.
The WEF appeared to suggest more focus should be placed on bringing expertise to pension fund boards, rather than offering solidarity to members, as it noted pension trustees in the Netherlands and UK "are chosen mainly as representatives of employers and employees, not as experts on pension issues", yet the UK pensions regime is increasingly introducing professional trustees and specialist executives, in part to satisfy the UK Pensions Regulator's requirement for appropriate knowledge of pensions matters.
Authors recognised that setting out a defined contribution plan investment strategy "requires a significant educational effort" but argued "not enough attention is paid to the risk of being forced to draw down on pension funds during an extended downturn" because it is assumed that equities will always go up in the long-term.
At the same time, they argued yet more needs to be done to improve participation in private pension systems. Data adapted by WEF from the OECD's recent Private Pensions Outlook report suggests just 11 European countries - Greece, Italy, Luxembourg, Netherlands, UK (through defined benefit schemes), Austria, Iceland, Hungary, Denmark and Turkey - are projected by 2050 to provide a 70% income replacement rate at retirement.
This is at the same time as employers appear to be "keen on reducing their contributions to defined contribution (DC) plans, which are gaining ground at the expense of DB schemes", said the WEF report.
It argued "institutional mechanisms" such as auto-enrolment and default contributions rates are "needed to facilitate the expansion of private pensions", even though it recognised 60% of people in Italy chose to keep their severance pay through the TFR, or Trattamento de Fine Raporto, even though they had the option of automatically directing it into a pension.
"There is a need for greater transparency and simplification of options to enable workers to make informed choices and take ownership of their retirement savings," said the report's authors. "Financial incentives may also be needed for lower-to middle-income workers. So may greater flexibility in contribution schedules and temporary access to funds in cases of emergency, especially where health insurance coverage is not widespread."
Within the 11 solutions provided on pensions and healthcare issues provided, the WEF argued regimes should be altered to gradually reduce the replacement ratio for current and future retirees, by either offering average salary benefits or by limiting increases against inflation.
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