We are entering the era of tough decisions for pensions and retirement savings.
For all their differences, our global pension systems face common problems: the taxes of the young cannot fund the retirement of the old indefinitely and the young themselves are not engaged in saving enough for their own futures.
Although they apply to different degrees in different countries, we see three major endemic issues:
Outdated and unaffordable policy frameworks
Policymakers find it ever harder to balance the needs of a growing retired electorate against what the working population can afford to pay. Governments are reluctant to reduce existing promises and pension systems are strained by decades of changing policy. In consequence, individuals lack trust and understanding in the system, and often aren’t engaged in saving for retirement.
Stagnant and inefficient infrastructure
In an era of low-cost, innovative, globally coordinated supply chains, the pensions industry lags in realising economies of scale and becoming truly digital. Regulation, providers, technologies and infrastructure are fragmented; even the largest global players lack the scale and brand strength common in other industries. The key stakeholders — governments, regulators, employers and providers — are yet to exploit the benefits of collaboration through connected technologies and innovative partner models.
Consumers’ intensifying lack of trust and their experiences with pensions are often neither easy nor convenient. Occupational schemes and private pensions struggle with helping individuals whilst ensuring that they are not overstepping regulatory boundaries. Poor choices are being made at all levels because stakeholders have not harnessed digital technology, analytics, behavioural economics and views of the risk aligned to today’s life spans.
A bold and positive vision for the future
Where we see problems, we also see opportunities. Rethinking the way we interact with pensions can empower individuals to make better decisions about their financial well-being and can create an environment where all stakeholders can invest with confidence. Embracing technology and social flexibility can facilitate better retirements for individuals and families, more flexible workforces for employers, greater profitability for providers, and more sustainable economics for pension schemes and governments.
Doing nothing is no longer an option. We can find a way to deliver financial well-being for everyone only by starting from a bold and positive vision, and engaging honestly with all stakeholders about the tough decisions required. However, there is no one-size-fits-all solution. So, we have set out EY’s vision of a future state that can be adapted to the different needs and starting points of different systems. We have been bold, but also pragmatic, and have looked to address today’s policy needs and exploit today’s emerging technologies. Creating a world where governments, regulators, employers, and pension and retirement organisations balance adequacy, sustainability and fairness to enable better outcomes for individuals will certainly be a challenge. Nevertheless, we hope that stakeholders can see the value and opportunities that stem from the pensions of the future.
As you read this paper, we invite you to ask:
- What levers can help a pension system evolve predictably, but with agility?
- How can technologies, such as universal IDs and digital payments, improve affordability?
- How can we engage individuals in finding the balance between sustainability and adequacy?
At EY, we are committed to building a better working world, and that includes rethinking retirement and retirement savings. Better retirement outcomes start with effective financial education from early years through to adulthood, but that is only the first step. Success depends on building a system that supports every individual in making effective decisions about today and the long term throughout many different facets of everyday life.
We have developed a number of hypotheses for what would constitute a fair, sustainable and successful pension system for 2030, grouped into three overarching themes. In the pages that follow, we explore these themes and describe the roles of various stakeholders in retirement delivery in 2030. Tough decisions lie ahead, but so does a better retirement world. We look forward to helping you build it.