Delegates debate thorny issue of post-retirement income

The hot topic of post-retirement income provided industry delegates with food for thought at the first Asia-Pacific 2011 Pensions Forum staged in Hong Kong yesterday.

In the opening session entitled “Setting public policy around pension systems”, Peter Smyth, executive vice-president and managing director of MetLife Asia-Pacific, described the retirement income issue as the elephant in the room.

“Mutual fund-style drawdown does not work,” he argued. “It’s like dollar-cost-averaging in reverse. The popping sound you can hear is drawdown plans all around Asia blowing up because people are going to take too much money out of them [on retirement].”

The question of post-retirement income is one which continues to hound governments and the pensions industry: that people are not saving enough to live on sustainably once they have stopped working.

Smyth suggested a combination of a guaranteed product with a drawdown plan was required, “but you only get to the drawdown plan once you have enough to secure basic [retirement] income levels. So you start with a guarantee.”

It is worth noting, of course, that insurer MetLife sells lots of guaranteed retirement income products – to the tune of $25 billion in the US so far this year, according to Smyth.

“People have got the idea [in the US],” he added. “The problem is, to [achieve a combination of guarantee and MF drawdown] you need a rich, broad and deep capital market. As I look around the world, I don’t see that anywhere else [other than the US].”

He said one key to solving some of the challenges facing the world’s pensions markets – fund balances in OECD countries are still well below 2007 levels – was developing and deepening capital markets to enable use of financial instruments to deliver guaranteed products.

But Ross Jones, deputy chairman of the Australian Prudential Regulation Authority – Australia’s financial services watchdog – described guarantees as a problem, musing: “What are you going to guarantee, a rate of return? And who is going to guarantee it?

“If all you are guaranteeing is that they are going to get back what they put in, that is not going to get you very far. Governments provide guarantees of capital.”

Smyth had already (half-jokingly) likened state-funded pension plans to “a great big ponzi scheme” in which governments promise entitlements without clear, separate funding.

“People come to expect that government will provide certain things out of the black hole known as a government budget,” he noted. “That contract will have to be redrawn because of economic realities. The push will be into mandatory private schemes. This is where most of the action is.”

Jones agreed that the retirement income from public sources will continue to decline even as the proportion of government spending continues to rise. By way of example he pointed to Italy, where he said 15% of GDP now goes into the provision of public pensions (second highest to Japan).

“The proportion [of government spending] continues to rise, but the benefits to the individual continue to fall,” he said. “Consequently there is no choice but to look at systems of private pensions and defined contribution (DC).”

Yet he cautioned the room that there was increasing concern in several countries that DC was not delivering, particularly in Eastern Europe as well as Argentina, which moved to re-nationalise its private pension system. He said this was not merely an economic problem, but a political one.

“In DC systems, regulators can’t regulate for a promise,” he observed. “The [defined benefit] system promises you will get x%. But what promise is there in DC? None at all.”

Only a few minutes earlier, Hong Kong’s financial services secretary KC Chan had described Australia’s superannuation scheme as one of the nation’s greatest public policy success stories.

But Jones said: “In Australia we jokingly talk about the superannuation guarantee. Many of our members have realised over the past couple of years that there is nothing super about it, and nothing is guaranteed.”

He stressed that he was losing confidence in the effectiveness of financial education, and said the notion of improving education as a mechanism to solve any of the problems over the last few years was unrealistic. He added that continual changes to national pension systems would act as a deterrent to education efforts.

He concluded: “The real challenge for [the pensions industry] is to redevelop confidence." (This is something KC Chan had earlier praised Australia’s superannuation scheme for after pointing out it had raised its member contribution rates from 3% at inception to 9% currently.)

“We need a DC system, it needs to be understandable and, most importantly, people need to have confidence in the system,” said Jones, arguing in favour of raising contributions over the long term. “Because, in the absence of that confidence, politicians will have no choice but to move away from the DC system. Move away to what? Well, there is no alternative.”

The Asia-Pacific 2011 Pensions Forum was hosted by The Association of Superannuation Funds of Australia. AsianInvestor will publish further reports from the event this week.