The payout phase of funded pensions Workshop on private pension provision – decumulation phase

1. 7 September 2007 The payout phase of funded pensionsWorkshop on private pension provision – decumulation phase Deborah Cooper London, UK

2. The payout phase of funded pensionsAgenda • Context • Terms of reference • What is being investigated • What we know already

3. The payout phase of funded pensionsAgenda • Context • Terms of reference • What is being investigated • What we know already

4. The payout phase of funded pensionsObjectives of pension saving • Sustainability • Adequacy • Modernisation

5. The payout phase of funded pensionsPensions vs poverty

6. The payout phase of funded pensionsPossible objectives of pension saving

7. The payout phase of funded pensionsPension environment • Defined benefit provision replaced with defined contribution • Government provision replaced with employer provision • Employer provision replaced with private saving • People living longer • Working lifetimes getting proportionately shorter • Measurements of adequacy - replacement ratios

8. The payout phase of funded pensionsAgenda • Context • Terms of reference • What is being investigated • What we know already

9. The payout phase of funded pensionsAims of investigation • To determine how sucessfully payout phase helps savers to achieve these aims • To consider whether there are obstacles • To consider whether markets or regulators could make it easier to achieve these aims • Security vs. flexibility • Making use of international comparisons

10. The payout phase of funded pensionsNeed for regulation – does one size fit all? private private private state state state

11. The payout phase of funded pensionsAgenda • Context • Terms of reference • What is being investigated • What we know already

12. The payout phase of funded pensionsWhat is being investigated Step 1: • Create an inventory of Member states pension markets including: • Requirement for annuities • Options for lump sums, drawdown, other forms of payment • Indexation requirements • Interaction between tax and social security regimes • Commentary on types of annuities, single, joint-life,

13. The payout phase of funded pensionsWhat is being investigated Step 2: • Review of recent and anticipated market developments • Commentary on annuity form flexibility and pricing structures. • Analysis of risk management options • Analysis of information and advice available for provider choice. • Consideration of cross-border provision of annuity • Hurdles to greater availability and product development. • Commentary on other retirement saving vehicles, or other forms of saving products

14. The payout phase of funded pensionsAgenda • Context • Terms of reference • What is being investigated • What we know already

15. The payout phase of funded pensionsBehavioural economics • Individual savers on average are: • relatively unsophisticated • have low levels of saving • People tend to be ‘optimistic’ when making savings decisions. They: • do not understand investments or investment risk • ignore inflation • underestimate their longevity

16. The payout phase of funded pensionsWork and Savings Survey – UK employees • 85% of employees think planning for retirement is important • Only half feel confident they are doing enough to prepare • Over a quarter worry that they do not know what to do • Only 20% of employees understand what an annuity is • 52% of people believe they will receive a pension income (excluding state pension) in excess of 50% their salary • Average contributions to UK occupational DC schemes are 9% • 2/3rds expect to retire at or before age 60

17. The payout phase of funded pensionsWorkPlace Survey – US employees • For 85% of employees, retirement is the most important reason for saving • For 24% of employees, not saving enough for retirement is their biggest financial worry • 65% think they are not saving enough for retirement • 53% worry that in retirement they will not be able to afford health care

18. The payout phase of funded pensionsWhat we know already about provision - 1 • Lifetime annuities most common • 1st pillar in annuity form, sometimes with partial lump sum option • 2nd, 3rd pillars more varied • Availability of lump sum tends to be • Related to size of first pillar • Countries with large 1st pillar more likely to permit lump sum • Related to size of second pillar • Countries with little 2nd and 3rd pillar provision more likely to permit it to be taken as lump sum • Related to size of fund • Annuity requirement relaxed for small funds

19. The payout phase of funded pensionsWhat we know already about provision - 2 • Sometimes: • Annuity indexed to prices • Joint life annuities compulsory • Some of risks borne by individuals are shared • E.g. system takes some investment/inflation/longevity risk

20. The payout phase of funded pensionsInternational experience – three different regimes

21. Questions? What is the purpose of 2nd and 3rd pillar retirement saving? How permissive to you believe retirement regimes can be? Should social security systems protect themselves from excessive drawdown? Do annuity streams meet the consumption needs of people in retirement?

22. The payout phase of funded pensionsSources • OECD Employment Outlook, OECD 2006, http://www.oecd.org/dataoecd/53/15/36900060.pdf • Selection of pensions at a glance indicators – how does your country compare?, http://www.oecd.org/dataoecd/13/61/38710921.xls • Benefit plans throughout the world, Mercer • Work and Savings Survey, Mercer UK • WorkPlace Survey, Mercer US • Joint report on social protection and social inclusion, Brussels 6.3.2007, SEC(2007) 329 • Central and European Pensions 2007, Allianz Global Investors • Preliminary responses to Payout phase survey questionnaire, Mercer