Pension stakeholders see need to collaborate and improve long-term distribution strategy

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Friday 11th September 2015

  • New EY report highlights key areas for governments, pension plans and providers to address in order to ensure future viability and minimize liabilities
  • Digital applications can help inform and simplify consumer choices, but few pension systems and providers have fully adopted them

Key public and private sector stakeholders face mounting pressure to develop more robust and clearer long-term pension and retirement distribution strategies as reforms and consumer choices increase, warns a new global report by EY.

The $500 trillion prize: A customer-centric vision for the global pension and retirement market is based on insights from governments, policymakers, pension industry executives and corporate employers in 21 countries, including Australia. The report looks into the maturity levels of various aspects of pension distribution, including framework, policies, incentives and all actions related to designing, offering and spreading pension and retirement products and services through the retail customer base.

It highlights the need for greater collaboration between key stakeholders in order to improve consumers’ financial well-being as the retirement and pension landscape shifts in focus from defined benefits to defined contributions.

EY’s Global Pension & Retirement Leader, Josef Pilger, says addressing this transformation will require policy and industry change and investment in many countries.

“On their own, reforms give consumers choices without adequately considering their experiences and perceptions or the information and tools they need to make informed decisions,” Pilger said.

“People are not as disengaged as we often believe. We need to work together to change our attitudes, policies and delivery systems by putting the focus on the customer instead of the products, to help them make the best possible decisions to build their financial well-being.”

One-third of respondents lack long-term strategy
Vision, strategy and role clarity are the foundation of public confidence in pension administration, the report finds. However, one-third of survey respondents lack a clearly defined long-term pension and retirement vision and strategy.

In particular, governments, policymakers and regulators recognize the significant need to improve their long-term pension and retirement strategy, as governments may be an underwriter of last resort for pension and retirement gaps. According to those interviewed for the report, only two-thirds of governments, policymakers and regulators have a clearly defined long-term strategy.

EY’s Superannuation leader for Oceania, Maree Pallisco, said unless progress was made in this area, governments may find themselves under pressure as the underwriters of last resort for pension and retirement gaps.

“While Australia’s superannuation system is well positioned relative to many other countries, the local industry still faces challenges. In the coming decades, the increasing costs of health care, aged care and pensions will put significant strain on the national balance sheet and, like many countries, we’re looking at the challenge of how we are going to fund and support an aging population – particularly in delivery,” Pallisco said.

“Government and regulators clearly have a key role to play in developing a strong framework for retirement funding, but they can’t do it in isolation. The private sector also has an important role to play in setting vision and strategy. Providers need to understand the experience and outcomes desired by consumers and infrastructure needed to help address these distribution challenges to ensure the sustainability of our superannuation system.”

“The survey also showed a gap between the views of government and policy makers and pension plan providers in a number of areas including having clear strategy and the effectiveness of their communications, with the public sector tending to rate these area lower. The industry needs to work closely with the government and policy makers to better define the objectives of the system as a whole,” Pallisco said.

Empowering informed decisions creates distribution action
The report also shows that while shift from defined benefits to defined contributions means consumers and employers face more decision points about participation and investments, they may then lack the appropriate information to make informed financial decisions.

Not surprisingly, corporate employers appear to be ahead of other sectors in providing adequate advice and information to pension plan participants. Seventy-five percent of corporate employers in the survey said they had a professional system in place, though they could make improvements. One-quarter rated their capabilities as leading.

The report finds that empowering engagement and informed decision-making through additional communications, support and planning must become a key tenet for all pension and retirement systems and solutions.

Digital can support informed choices, but is still in its infancy
The pension and retirement industry is still determining how to maximize the long-term opportunities digital applications offer. According to the survey, half of corporate employers give themselves low digital maturity scores, while 54% of governments, policymakers and regulators acknowledge the need for adopting digital communication and technology.

Digital maturity ranges from social media use to a long-term digital strategy, systemic use of big data and analytics, digital marketing, and disruption through digital pensions and the Internet of Things. Technological advances can also help providers reduce the cost of advising and investing, as well as complying with regulatory demands.

The survey suggests that while administrators understand the bigger picture of moving towards digital platforms, they also recognize that this element is only part of the solution towards creating greater efficiencies.

Pallisco concludes: “Digital can help move the evolution toward consumer empowerment forward, but it is only one piece of the puzzle. Helping consumers’ achieve their financial goals will require leaving behind the paternalistic approach of the defined benefit system and taking a complete view of their financial needs.”

“We need to transform and align policy, regulation, culture and delivery infrastructure to empower adequate decisions, experience and approvals. The prize is substantial and will deliver a better retirement world for all stakeholders.”

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About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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This news release has been issued by Ernst & Young Australia, a member firm of Ernst & Young Global Limited.

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About the report
The report was compiled from almost 200 interviews and more than 150 questionnaires with top representatives of governments, policymakers, regulators and pension industry executives in 21 countries across the Americas, Asia-Pacific, Europe and Africa. Participants were asked to self-assess their maturity levels on a scale of 1 (low) to 5 (high).