Two mature Defined Contribution (DC) markets— the UK and US—appear to have mirrored each other in many aspects of their DC evolution, employing similar tactics, but on slightly staggered timelines. Here, we explore lessons learned from each market; particularly where each program has flourished, and where progress has stalled.
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.