Global Defined Contribution Savings Systems: Implications for U.S. State Treasurers

John Mitchem, Principal, JM3 Projects

John Mitchem is an enthusiastic proponent of global retirement savings innovation. John focuses on thought leadership strategies and communications for financial services organizations and has authored a wide range of relevant works. John was a contributor to 2018’s excellent
From Here to Security: How Workplace Savings Can Keep America's Promise, by Robert L. Reynolds, President and CEO, Great-West Financial and Putnam Investments, with Lenny Glynn and John Mitchem.

Private defined contribution savings systems like the 401(k) can work very well, particularly in a robust marketplace in which service providers compete and continually innovate.  But these systems typically fall short in their coverage of smaller companies and lower income workers.  

In response, many governments have designed universal workplace savings (UWS) programs designed to cover the entire labor market.    Government-administered programs like the Central Provident Fund (CPF) in Singapore or the Mandatory Provident Fund (MPF) in Hong Kong are examples of long-established government programs.

Another long-established program, the A$3 trillion Superannuation system in Australia is privately managed by numerous professional financial firms.  Unlike the 401(k) system, the system covers the entire labor market and is mandatory with no opt-out.  Employees must defer 9% of wages, with this requirement gradually increasing to 12% by 2025. 

More recently we have seen the pattern of government-facilitated, and privately administered defined contribution workplace systems that stand alongside private systems.  In the U.K., the National Employment Savings Trust (NEST), is an automatic enrollment system managing some £6 billion for 8 million workers at 900,000 employers that don't offer private DC solutions.  Workplace savings systems are mandatory (with opt-out) in the U.K. – whether private market solutions or NEST.  As with U.S. state-facilitated IRAs, NEST is primarily designed as a “backstop” for private DC savings plans and serves primarily lower-income workers, contingent labor and employees of micro enterprises

An interesting difference between the two is that NEST actually competes with other solutions.  NEST and private plans are not individuated the way that U.S. 401(k)s and IRAs are.   NEST and master trusts are both regulated as occupational pensions, with identical annual contribution limits, tax allowances etc. So, NEST could also be used by larger companies with higher income workers.  This creates a healthy competition that tends to drive innovation, improved pricing, transparency and other virtues associated with competitive markets.  

NEST and the U.S. state-facilitated workplace IRAs are evolving together, spurred on by a vigorous public policy dialogue carried out through institutions like the Georgetown University Center for Retirement Initiatives (CRI), the Aspen Institute Financial Security Program (FSP) and various industry associations.    

In a "framing" white paper, Aspen-Nest Insight Transatlantic Collaboration, those organizations identify the mission of emerging UWS programs as improving retirement systems for low and moderate income workers left uncovered by private systems and buffeted by growing income and wealth inequality, non-traditional forms of employment (the "gig" economy) and extending longevity.

These new universal workplace savings plans on both sides of the Atlantic share a common intellectual wellspring of a sort –  a 2009 book entitled Automatic: Changing the Way America Saves edited by William Gale, Mark Iwry, David John and Lina Walker, published by the Brookings Institute Press and the Brookings Retirement Security Project.  The book features essays on the U.S. Pension Protection Act of 2006; pursuing universal retirement security through Automatic IRAs; an assessment of DC savings systems in Australia, New Zealand, the UK and Chile; and essays on the challenges of savings drawdown or “decumulation”.

Defined contribution systems are also on the rise in Continental Europe. In northern Europe (the UK, Netherlands and Scandinavia), traditional defined benefit systems being transformed in to defined contribution savings plans.  In Eastern and Southern Europe, defined contribution systems have functioned for a generation, mostly in former-socialist economies that embraced DC savings when they evolved into market economies.  

But while larger economies at the core of Europe, notably France, Germany and Italy have traditionally relied on pay-as-you-go government pensions, times are changing.  Under pressure of growing longevity risk, strained government budgets and persistent low interest rates, governments are casting about for private solutions. 

France has elaborated legislation that would provide a framework for new DC savings plans for companies and individuals.  Existing defined contribution programs in France are quite limited, and are usually private offerings, mostly in very large companies and often designed as "top-up" plans for highly-compensated executives.  But the NEST system, and the rising U.S. auto-IRAs are being closely watched by policymakers and are actively under discussion by stakeholders, much as our U.S. auto-IRA programs have been discussed in state legislatures and other fora over the past 5-10 years.

Emerging auto-IRA programs in the United States are very much part of a gathering global trend.

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This piece was featured in June 4, 2020 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.