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Excerpted with permission of the publisher, Wiley, from Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life, 2nd Edition by Moshe A. Milevsky and Alexandra C. Macqueen. Copyright (c) 2015 by Moshe A. Milevsky and Alexandra C. Macqueen. All rights reserved. This book is available at bookstores and online booksellers
Pension systems in all of the regions we are focusing on have changed since the financial crisis. These reforms followed an earlier wave of changes implemented in the previous decade. Here's an overview of the current pension landscape in each region.
The United States
In 1989, approximately 60 per cent of the employed population had pension coverage of one kind or another, with the proportion of defined benefit to defined contribution plans split close to equally.
In 2013 (the latest year for which data are available), 46 per cent of American workers aged 21 to 64 participated in an employer-sponsored pension plan – but only 26 per cent participated in a defined benefit pension, with the remainder in defined contribution plans. And of the workers participating in defined benefit plans, more than one in two are in the public sector.
The United Kingdom
The role of the defined benefit pension in the United Kingdom has diminished drastically since the year 2000, especially in the private sector. The decline has been so steep that many observers believe that the defined benefit plan "cannot survive as an institution" in the private sector. Across the United Kingdom in 2013, there were a total of 8.1 million people enrolled in voluntary occupational pension plans–the lowest level since the 1950s.
For both DB and DC occupational pensions, in 2013, just under two thirds of membership (65 per cent, or 5.3 million) was in the public sector and just over one third (34 per cent, or 2.8 million) was in the private sector. This is in contrast to 1953 (when the pension survey from which these data are taken was first run), when active membership of occupational schemes was divided equally between the private and public sectors.
For the younger generation, the option of joining a DB scheme is much reduced. In 2013, only 38 per cent of DB plans were open to new members. In 2014, the number of active participants in DC plans outnumbered active participants in DB plans. The United Kingdom is now undertaking a major reform of its pension system. In October 2012, the government began rolling out automatic enrollment into workplace pension schemes. Once complete (in February 2018), all employers will have a legal duty to enroll all qualifying workers in a workplace pension plan, which can be either defined contribution or defined benefit. To support automatic enrollment, the government has also established the National Employment Savings Trust (NEST), a trust-based occupational defined contribution scheme.
And, most recently, in March 2014 the requirement that U.K. residents must purchase an annuity with DC pension savings by the age of 75 was removed. Options for accessing savings in DC pensions now include withdrawing funds over time or as a lump sum, in addition to annuitizing.
Canada
In Canada, steady public sector employment growth, where DB pension coverage is nearly universal, has partially obscured the large decline in voluntary occupational pension coverage in private-sector employment over the past decade. In 2012, a total of 33 per cent of the Canadian labor force was enrolled in a registered pension plan, a proportion that is unchanged since 2002. Eighty-six per cent of public-sector workers are enrolled in a registered pension plan (again, a figure unchanged since 2002), but the proportion of private-sector workers covered by a pension plan declined from 27 per cent in 2002 to 24 per cent in 2012.
At the same time, the proportion of public-sector workers enrolled in a DB pension plan increased from 2002 to 2012, from 93 to 94 per cent, while the proportion of private-sector workers with DB plans fell dramatically, from 73 to 48 per cent – and where DB plans exist in the private sector, most new employees are not offered membership in DB plans. A recent survey of retirement readiness found a strong majority of Canadians – approximately 80 per cent – are financially prepared for retirement. However, the survey found that those who are least prepared for retirement are middle– to high-income households who either have access to employer-sponsored retirement savings vehicles but don't contribute enough to these plans, or don't have access to an employer plan and have below-average personal retirement savings.
Australia
In Australia, the advent of compulsory superannuation, a mandatory employer contribution to a private pension plan, in 1992 prompted the closure of many employer-sponsored pension plans. Twenty years ago, in 1995, there were slightly over 4,200 employer-sponsored plans; by 2010, that number had fallen to just 168.
Today, the Australian employer-provided pension system stands out from other industrial country systems for two reasons: first, coverage has more than doubled over the past 25 years (among people who are employed, coverage is close to universal); and second, the dominant kind of pension plan is now defined contribution, not defined benefit.
At retirement age, members of a superannuation plan can withdraw the accumulated capital as a lump sum or as an income stream. Currently, most benefits are taken as a lump sum (at least in part), and the pensions industry in Australia is now grappling with the question of how lifetime income in retirement can be generated from these plans.
New Zealand
New Zealand is home to the first nationwide auto-enrollment retirement savings plan in the 34 countries of the OECD. "KiwiSaver" retirement savings accounts were introduced in 2007 and have been highly effective in ensuring high participation rates among new employees, due to the automatic enrollment feature (which requires participants to opt out).
Today, about 55 per cent of workers in New Zealand are enrolled in KiwiSaver accounts. KiwiSaver entitles members to a lump sum, not a pension, on withdrawal at age 65 or over. Prior to the development of the national KiwiSaver program, less than 10 per cent of the population of New Zealand had access to a company-sponsored pension plan.