Public policy is often a major catalyst for DC plan design. By setting plan standards and limitations, legislative changes help buoy public opinion and spur plan innovation. Policy as a change agent becomes increasingly important as governments seek to manage the impact of a large retiree population on national finances, while establishing opportunities for workers to actively plan for their financial future.
While policy initiatives across the globe vary by national, cultural and financial influences, there are increasingly parallels as most markets are converging towards a DC model. Less mature DC markets appear like an abstract or impressionist rendition of the same subject; more mature DC markets can reflect shared learnings, looking like mirror image advances.
The UK and US offer perfect examples of this phenomenon, employing similar tactics but along slightly staggered timelines. Here, we will explore where each program has flourished as a result of policy initiatives, and where progress has stalled.
Both countries have embraced a common approach: automatic enrollment into a matching contribution structure that features a default investment fund. The difference being that this is mandated for all companies in the UK.
Access & coverage
While later to implement the DC model, the UK has moved faster in extending DC access and coverage, thanks to the Pension Act 2008 which required employers to offer retirement savings plan access. To meet the mandate, particularly for smaller employers not able to afford plan costs, several key master trusts (known in the US as multiple employer plans or MEPs) emerged, including the government-sponsored National Employment Savings Trust (NEST) and the nonprofit, The People’s Pension (TPP).
In the US, MEPs are still gaining traction, with a number of bills in Congress that would further promote their expansion. At State Street in the US, we continue to advocate for the yet-to-pass Automatic Retirement Plan Act (ARPA), a national requirement that all employers automatically enroll employees in a retirement savings plan.
Longevity, lifestyle and early savings withdrawals are factors that could lead a significant retiree population to outlive their savings — a potential crisis that requires a concerted and proactive approach. A retirement income solution centered on guaranteed payments later in life could help. In the US, the Department of Labor (DOL) published guidance supporting lifetime income in 2014, paving the way for a Qualified Longevity Annuity Contract (QLAC), or deferred annuity funded within a retirement savings plan, to become a contender. The concept of an annuity can be unpalatable in some countries. The UK lifted the annuity obligation in 2015 as part of pension reform. However, the new approach in the US may offer a meaningful solution to the lifetime income challenge, provided it can feature the flexibility retirees’ demand.
Preparing for the Next Generation of Retirement
The DC plan portrait becomes increasingly crisp and consistent as UK and US markets continue to learn from each other. While the approaches to accumulation are aligned, the UK leads on expanding access and coverage models, with the US pursuing public policy advocacy to increase participation.
State Street Global Advisors has long advocated for a national requirement that all employers automatically enroll their employees in a retirement plan.
However, both countries continue to grapple with the issue of retirement income, given new demographic and DC challenges. Policy is a powerful tool for adoption and could create the comfort required by industry stakeholders and participants to embrace an annuitized approach to lifetime income.
The practice of enrolling employees in a retirement savings plan automatically, used by some employers to promote participation. Auto-enrolled individuals are given a default savings rate and investment fund, which they can then modify or opt out of entirely.
The automated increase of a participant’s rate of contribution to their defined contribution plan, designed to encourage the participant to save more.
Default Investment Vehicles
Investments used by plan sponsors as the default for any participant whom they have automatically enrolled in a retirement savings plan.
Defined Benefit Plan
An employer-sponsored retirement plan where employee benefits are derived from a specified formula using factors such as, but not limited to, salary history and duration of employment. Investment risk and portfolio management are entirely under the control of the company.
Defined Contribution Plan
An employer-sponsored retirement plan whereby employees make contributions to accumulate wealth during their working years to provide income in retirement. Often times, an employer will match an employee’s contribution, up to a certain amount.
The views expressed in this material are the views of SSGA Defined Contribution as at 30 April 2018, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.
Unless otherwise noted, the opinions of the authors provided are not necessarily those of State Street. The experts are not employed by State Street but may receive compensation from State Street for their services. Views and opinions are subject to change at any time based on market and other conditions. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information, and State Street shall haveno liability for decisions based on such information.
The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of
falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the
extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those
securities may fall sharply. This may result in a reduction in income from debt securities income.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Annuity withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty.The issuing insurance company reserves the right to limit contributions.
Investing involves risk, including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Diversification does not ensure a profit or guarantee against loss.
© 2019 State Street Corporation. All Rights Reserved.
Exp: July 31, 2020