Amy B. Resnick

Executive Editor

Pensions & Investments

Global Trends of DB and DC Plans

P&I top 1,000 U.S. asset growth since 1973

$-

$1

$2

$3

$4

$5

$6

$7

$8

$9

Total retirement assets ($ trillions)

Total retirement assets ($ trillions)

U.S. DB/DC growth since 1985

$-

$1

$2

$3

$4

$5

$6

$7

$8

$9

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Defined benefit assets Defined contribution assets

Note: 1985-1988 data is top 200 only; top 1,000 breakout began in 1989

P&I top 1,000 U.S. DB plan asset allocation, 1973-2013

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Equity Fixed income Alternatives Cash Other

P&I top 1,000 U.S. DC asset allocation, 1988-2013

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Equity Fixed income Target date Cash Other

George Castineiras, Senior Vice President

Total Retirement Solutions

Prudential Retirement

ROUND TABLE DISCUSSION: Global Trends of DB and DC

7

8

I might live how long?

I’ll do it later It won’t happen to me

I just can’t resist I want it now

1

Stuart H. Leckie, O.B.E., J.P., F.I.A., F.S.A.Founding Chairman, Hong Kong Retirement Schemes Association

Global Trends of DB and DC Plans

PRC Population• Total: 1.37bn

• Rural Population: 640mn

• Urban Population: 730mnSource: National Bureau of Statistics Annual Report

Population Ages:

0-14 226mn – 16.5%

15-59 944mn – 68.9%

60+ 200mn – 14.6%

Consider:

One child policy – reduced population by about 400mn

Greatly improved life expectancy

Dependency ratio deteriorating rapidly

Population Sex Ratio currently 118 males born for each 100 females

Solve population problem through migration? – NO!

420mn people over age 60 in 2040

Implication of Demographics

• Work force declining as proportion of population

• Over 200m migrant workers

• Urbanisation: in 2030, there will be about 300mn rural

& 1,100mn urban citizens

• “Hukou” system to evolve

• Lower economic growth rate

• Financial strain of paying pensions

China’s Pension Systems

STATE COUNCIL

NSSF

CIVIL SERVANTS

URBAN EMPLOYEES

ENTERPRISE ANNUITIES

URBAN RESIDENTS

RURAL RESIDENTS

MOHRSSMOF

Urban Employees Pension System

Source: Stirling Finance research. ER – employer; EE – employee.

Pillars

(World Bank)Chinese Terminology

Contri-

butionsBenefits

Funded

Status

State

ZeroZero:

Minimum guarantee (Di Bao)n/a Varies

From

Government

IIa:

Mandatory Social Pool Old Age Pension

ER: 20% of

salaries

Monthly pension based on average

local monthly wage, indexed

individual wage and years of

employment

PAYG

IIIb:

Mandatory Individual Account (IA) Pension

EE: 8% of

salary

Monthly pension of 1/139 of IA

balance at the time of retirement

provided at least 15 years’

contributions

Should be

funded

Private III

II:

Voluntary Enterprise Annuity (set up by eligible

employers)

ER; EELump sum

or annuity benefitFunded

III:

Other Voluntary Benefits, e.g. Insured Group

Pension Plans

ER; EELump sum

or annuity benefitFunded

Private

& StateIV

IV:

Family support; subsidised healthcare and

housing

n/a Varies

From

Government

or Family

Pillar 1a• Employer contributes 20% of

wages

• Defined benefit

• Unfunded

Big problem:

- Pillar 1a will be seriously affected

by deteriorating demographics

General problems: • retirement age too low• poor governance• weak preservation portability• lack of understanding

Pillar 1a• Employee contributes 8% of

wages

• Defined contribution

• Funded (partially)

• Big problems:

- Empty individual accounts

- Poor investment returns

“This is not the End or the Beginning of the End,

but may be the End of the Beginning!”

Thank You!

Dennis Simmons

Principal, Global Retirement Savings, Legal

Vanguard

June 2014

Global Trends of DB and DC Plans

System pressures force changes – Drive for “Efficiency”

Rising pressure from aging populations - one response of system trustees and

regulators is to improve system-wide efficiency

Focus on three aspects of system efficiency:

• Defaults - “Efficiency” in the traditional investment sense, of maximizing

portfolio diversification; efforts of regulators and policymakers.

• Costs/Fees - “Efficiency” in the cost sense. How do fiduciaries and

regulators minimize administrative and investment costs—including how

indexed-based options may reduce system costs?

• Payout phase - “Efficiency” in a more novel sense—the payout phase. How

can members translate DC account-based savings into regular income in

retirement?

Growth of professionally managed allocations in U.S. 401(k) plans

Percentage of participants with professionally managed allocations—we predict 58% in 2018

2%4%

8%

13%16%

20%24%

27%31%

7%6%

7%

7%

7%

6%

6%

6%

6%

6%

1%

1%

2%

2%

3%

3%

3%

3%

3%

0%

50%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Target-date fund Target-risk or traditional balanced fund Managed account program

33%

7%

17%

22%

25%

29%

9%

12%

36%

Source: Vanguard, 2014

Default funds: Global systems

• UK

o Very high default rate

• HK

o Informal reports: surprisingly low default rate

o MPFA concerns: disparate default returns and high fees

• AUS

o Over 80% default rate

o MySuper – instituted in January 2014

Costs / Fees -- Member behavior impacts

• Defaults. Default effects will be profound in determining ultimate system costs. The composition

of the default (active v. passive) will strongly influence aggregate and individual member costs.

• Active choice. Choice effects can also be relevant. A low-cost target-date series will be adopted

more rapidly due to its simplified decision heuristic, choice of portfolio based on retirement age.

• Menu effects. In an active choice environment, the composition of the aggregate menu will also

influence costs. All things equal, a menu with more low-cost options will lead to members

holding lower-cost portfolios.

• Inertia. Inertia will profoundly affect existing member balances, since few individuals revisit

allocations over time. A strategy like reenrollment, in which members are automatically

transferred to a low-cost investment option, with the right to opt out to their existing holdings,

can lead to rapid changes in portfolio composition and costs.

• As an illustration of these factors, Vanguard’s U.S. 401(k) recordkeeping system only recently

shifted from majority active assets to majority index as a result of the growing use of index

target-date funds, both as defaults and for voluntary choice.

Scrutiny on fees

• US

o Significant litigation against DC plan sponsors

o Legislative interest

o Recently concluded 3-part regulatory initiative on

fee disclosure

• Global – imposing “hard” or “creative” caps

o UK – Fee cap proposal

o HK – MPFA under fire

o AUS – defaults with de-facto fee cap

Policymakers

Trustees

Funds

Consultants

Asset managers

Insurers In the U.S. alone,

78 millionbaby boomers have begun to retire, and

$14 trillion will be shifting from saving to spending

• Individuals are living much longer in retirement

• Lump-sum distributions are the common form of benefit from U.S. DC schemes

The post-retirement payout phase: The changing landscape - and a convergence of trends

Source: US Census, Vanguard estimates.

The income solutions marketplace

Portfolio (nonguaranteed)

strategies Hybrid guarantees Annuity-based guarantees

1st generation • Income investing

• DIY systematic withdrawal plans

(SWPs)

• Immediate income annuity

(SPIAs)

2nd generation • SWPs with advice

• Payout funds (liquidating v.

endowment-like)

• Living benefits

annuity (GLWB)

• Deferred income annuity

• Longevity insurance

Post-retirement income solutions

• US

o Significant product and service evolution

o Consistent but modest legislative interest

o Pending regulatory proposal on DC plan

illustrations

o In-plan vs. out-of-plan rules and debate

• Global

o DC systems less mature – early stages of debate

o UK: Removal of distribution annuity requirement

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The view from the UK

Summary

• Shift from DB to DC largely complete in the UK outside the public sector

• Parallels the collapse of trade unionism in the UK outside of the public sector

• Most problems with DC in the UK centre on how it was introduced and how it has been employed

• Occupational DC has been used historically by employers to drive down contributions

• Has its origins as a pillar three product – suitable for a minority but flawed in design and execution

• Is DC is a bad deal?

29

What do pension reforms mean?

• Estimated 11 million people covered by pension reforms

• Estimated 6-9 million people newly saving or saving more in all forms of workplace pension schemes

• Estimated 2–4 million individuals saving in NEST

A new opportunity for workers to save for the future

Source: Department for Work and Pensions Impact Assessment, Annex B, November 2011

Automatic enrollment and the power of inertia

Default

Do nothing

and you’re

out

Pre-Turner

70% are out

Default

Do nothing

and you’re

in

Post-Turner

70% are inSo far

92% are in

31

For NEST, we have the challenge of ‘onboarding’ hundreds of

thousands of micro employers. But there are policy challenges too…

Automatic enrollment and future challengesThe initial implementation of automatic enrollment can be considered a

success, but there are plenty of challenges still to address:

Scheme

quality

From DC

pot to

retirement

income

Adequacy

32

Prospect theory

33

Inertia it appears doesn’t always win out

34

What do plan members want?

35

Can DC plans deliver?

36

Recent UK announcements

• More freedom, flexibility and choice at retirement

• More collectivisation and risk sharing – a middle way between DB and DC

how compatible are these approaches?

37

Recent UK announcements

• More freedom, flexibility and choice at retirement

• More collectivisation and risk sharing – a middle way between DB and DC

how compatible are these approaches?

38