Money saved in old-style pensions that offer a guaranteed income in retirement has for the first time been eclipsed by newer pensions that do not, despite worries they are poorly designed, weakly governed and leave poorer savers worse off.
Assets in new defined contribution pension funds amounted to just over half of the $36.6tn saved in retirement funds at the end of 2018, according to figures published on February 11 by consultancy Willis Towers Watson.
The tipping point has been expected for years, with defined contribution plans having replaced final salary schemes for most young savers in the US and UK, particularly in the private sector. These two markets account for almost 70% of the world’s pension savings.
Many other rich nations, particularly in Europe, depend to a far greater extent on social pension systems that are unfunded, with pensions paid directly out of tax.
Willis Towers Watson’s figures relate to pension assets saved in the US, UK, Japan, the Netherlands, Switzerland, Australia and Canada — seven countries that account for 84% of the world’s retirement savings.
But despite the breakneck growth in savers’ capital, defined contribution funds are still thought by many to be inferior.
Roger Urwin, global head of investment content at Willis Towers Watson’s Thinking Ahead Institute, which produced the report, said: “Despite its long history, DC is still weakly designed, untidily executed and poorly appreciated. It will take better design and engagement to create meaningful contributions to retirement security.”
With no guaranteed pensions, workers’ retirement incomes depend on how well markets perform. More importantly, employers usually pay into the new funds at lower rates, and many company schemes are also small and poorly governed.
In the US, the Democratic majority in the House of Representatives has begun investigating DC plans. Diane Oakley, executive director of the National Institute on Retirement Security, told members of Congress on February 6 that the DB-DC shift had “increased the risks and responsibilities for individuals” and “negatively impacted the bottom half of US households”.
In the UK, attention has turned to DC schemes’ restricted investment scope. While DC schemes offer members choice over where their savings are invested, in practice this is restricted to different flavours of equity and bond funds, and upwards of 80% remain within schemes’ default funds — often a plain-vanilla mix of indexed equities and bonds.
Guy Opperman, the UK pensions minister, said on February 5 that he wants “the start of a new phase in defined contribution pension investment” as he launched government proposals to encourage more investment in off-market assets like infrastructure, private debt and property.
The initiative received a warm welcome from the investment industry. Mark Jaffray, head of DC consulting at Hymans Robertson, another pensions consultancy, said: “Illiquid assets or patient capital can significantly improve member outcomes at retirement.”
Willis Towers Watson’s survey also found the world’s pension assets had benefited from a large-scale shift toward private markets. Since 1998, funds’ allocations to alternative assets, including property, have swelled from around 7% of their money to 26%.
That has helped fuel a boom in private funds which is concerning some, but it also helped cushion pension schemes from the market rout at the end of last year. Their total assets dropped 3.3% in 2018, while equity markets ended the year 8.7% in the red.
Willis Towers Watson’s Urwin said: “2018 was the third-worst year for pension asset growth in the last 20, but it would have been quite a lot worse without the contribution from private markets that produced important risk diversification.”