This report examines the factors that shape the kind of pension provision employers offer, and how employees value those pensions compared with other benefits such as salary, holiday entitlements, medical and life insurance.
The basis for this research was the 2012 Aegon Retirement Readiness Survey which covered 8,100 employees in 9 countries, together with in depth interviews with 12 major international employers.
Understanding the current trends in occupational pensions will help to shape the twenty-first century solution to ageing societies. The World Bank's three pillar pension model continues to emphasize the importance of governments, employers and employees all working together to share the cost of an ageing society.
It is for this reason that we looked to the mature occupational pension markets – such as the Netherlands, UK, US and Germany – in offering potential insights not only in how existing pension fund arrangements will be reformed but also in signposting what kind of pension arrangements might take shape in other countries, in particular as the emerging economies look to develop their own pension systems for the first time.
Here are the key finding of the report
With governments no longer able to afford generous state pensions, employees are increasingly looking to company pension plans to fill the gap. Among the employees we surveyed, more than two-thirds believe such benefits should be a basic part of any worker's pay and conditions.
The majority of employees (58%) expect to work beyond the usual age for retirement, but companies do not yet offer the financial advice, re-skilling or opportunities their employees need to take up part-time working or carve out new careers.
Employees have not yet fully understood the implications of recent changes, or the growing importance of company pension plans. In our survey, employees ranked access to an employer retirement plan as less important when choosing a new job than pay, holiday entitlements, health insurance and career prospects.
The first generation of employees with new, defined contribution pension plans will stop work in the next few years – and are discovering they don't have enough money saved for retirement. Our survey found that currently only 15% believe they are on course to achieve the income they want in retirement.
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Recommendations
In recent years, automatic enrollment has played a very significant role in increasing employee participation in company pension plans – and in helping employees build savings for retirement. To be most effective, we believe employees should be given an 'opt-out' provision only.
Research shows this will help younger, lower-income employees in particular. A recent study in the United States found that automatic enrollment among low income employees would increase retirement savings, as a proportion of final earnings, by more than six-fold.
One of the employers we interviewed for this study said introducing automatic enrollment had resulted in 95% of employees participating in his company's retirement plan.
Employers could help by introducing a special mechanism in their pension plans that triggers an automatic increase in contributions after a fixed period of time.
This would help employees build savings gradually – often from a modest base that, in the normal course of events, would not be sufficient for a comfortable income in retirement.
Employees could, of course, opt-out of any increase in contributions they felt they were unable to make, and a pre-determined ceiling could be set to limit employee contributions to a certain percentage of their salary.
Our first two recommendations, we believe, would help address employees' lack of interest in saving for retirement. But employers should also consider the broader shift in attitudes toward retirement that we are seeing in both the United States and Europe – and introduce as much flexibility as they can into company pension plans to help employees who want to continue working, in some capacity, after their usual retirement age.
Increasingly, employees are looking to their employers to provide basic information on pensions and long-term savings.
Of course, employers must consider the legal ramifications, but we believe more should be done to encourage companies to facilitate financial education and advice to their employees to help them save for older age while they are working, to prepare for changes in their careers or personal lives, and to manage their savings effectively once they've stopped work.
We believe it's imperative governments maintain – or even increase – tax incentives to encourage employees to save for retirement. At a time when public spending is under pressure, the right tax incentives – both for employees and employers – will help to reduce dependence in many countries on state pensions.
Policymakers, we believe, should look at ways of simplifying pension plans, particularly for smaller businesses that currently do not provide retirement plans for their employees. One good example is NE ST (National Employment Savings Trust) in the United Kingdom.
Such plans may not offer the benefits and protection of traditional workplace retirement plans, but they would provide a good 'starter option' for small and medium sized businesses that currently struggle with the cost and complexity of introducing savings plans for their employees.
Once they stop work, most employees receive their savings in a lump sum – and are faced with the daunting prospect of re-investing these savings to generate sufficient income for their retirement.
Policymakers, we believe, should make it easier for employees by encouraging more financial products like annuities and variable annuities that will provide a steady income stream in retirement.
At the same, employers should make sure they provide the information and education that employees need as they prepare for retirement.
These days, employees change jobs more frequently than they used to, many working abroad. Further improvements, we believe, are needed to enable employees to move their pension plans more easily from one employer to another, or across national boundaries. these improvements should include a greater choice for employees on when and how they retire.
Governments have an important role in raising awareness of aging, particularly the changes aging is bringing to the workplace, and the reforms that will be need to make pension systems more sustainable. that means introducing policies that encourage companies to take on and keep older employees, promote a savings culture among those in work, and provide those preparing for retirement with relevant information.
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