Global Defined Contribution Themes I mplications for US policy

1. May 2008 EBRI Policy Forum Global Defined Contribution ThemesImplications for US policy Barbara Marder, Worldwide Partner Global Defined Contribution Consulting Leader

2. US Pension Protection Act Canada Ontario Expert Commission Alberta/BC Investigation Europe Pan European developments EFAMA Report : DC Schemes : Risks and advantages for occupational retirement provision United Kingdom Regulatory push for improved DC governance Cessation of DC contracting by 2012 Statutory requirement to provide DC projections annually 2012 Personal Accounts South Africa Holistic review of retirement funding and social security China Enterprise Annuity Hong Kong Proposals : Voluntary MPF contributions Choice of MPF Trustee Indonesia 2008 DB funding requirements may lead to more DC conversions Thailand DC legislation expected 2008/9 Australia Tax incentives Looking to simplify – ease of consolidation Chile Realization that cost structure is too high Global DC Themes“The world of retirement has changed and we live in a defined-contribution world now”* * Karen Salinaro, IBM's VP of Benefits and Compensation

3. Global ThemesThe world is flat! • Will DC schemes deliver? • Benefit adequacy concerns: • Contributions insufficient (often less than DB) • Or not even enrolling • Returns are too low: • Poor asset allocation – too conservative • “switching” • Fees are too high • Focus on expenses • Poor investment performance • Insufficient focus on managers

4. Global ThemesThe world is flat! • Societal view: • DC funds transfer risks to the group least capable of managing them • Government has increased its attention to these issues Retirement Services Roundtable – Cracking the Participant Code

5. Global ThemesThe world is flat! Additional concerns: • Member engagement • Member education/financial literacy • Leakage through pre-retirement withdrawals and borrowing • Cyclical retirements • What happens at retirement? • “good bye and good luck” • Longevity risk, what’s that? • Governance – who is overseeing DC plans?

6. Global ThemesDC Investments • Desire of participants to “delegate” decision making to a third party • Trend to reduce the number of funds offered • European DC survey: Plans offer 15 investment funds on average. 75% of plans offer a default option, used by 70% of members • UK DC survey: Median no. of funds offered in contract-based plans is 52. 85% of plans offer a default option. • Lifecycle/lifestyle/target age/target date funds are universally popular (but, surprisingly, not in Australia) and a common default option • Prediction that $920 billion will flow into these funds over the next 5 years. • Prediction that 75% of all 401(k) assets will be held in target-date funds within 5 years • Custom life cycle funds are gaining traction at the large end of the market • Alternatives are creeping into DC plans, usually as a “bundle” • Increasing desire of plan sponsors to delegate authority to third party

7. UK/North America Target date/ lifecycle funds PPA (USA) UK age-based/US target year Rationalization of investments Enormous focus on fees Full disclosure Inertia accepted as a reality Save more tomorrow Conventional assets, fixed asset allocation Annuitization (UK) Strong employer role Australia/Hong Kong Few options Generally balanced/target risk Target date/lifecycle unpopular Disengages employees? Inappropriate near retirement Age is too simple a factor Alternative assets, dynamic asset allocation, diversification (Australia) Strong focus on communication, education Strong influence of financial planners Lump sum payments only (Australia) Employer role is marginalized In reality responses will differ due to regulatory regimes But some global convergence is likely Global ThemesThe world is flat! Or is it?

8. Global ThemesLessons from Australia (most mature DC market)? Environment is different: • Compulsory membership and contributions • Lump sum on retirement • Master trusts Lessons? • Even if target date in place need for engagement/communication • Target date models can be improved • Why should DC schemes have “simple” investments? • More thought to be put into near retirement lifecycle offerings • Financial planning community has a strong influence

9. Global Theme - DC Communications/Member Engagement- Where does communication end and financial planning begin?- Will automation be the real answer? Targeted Communications: Personalized and/or Participant segmentation Financial Education Provided by 3rd party Managed accounts Employer-sponsored Education seminars Generic Communications Financial Planning • 49% of workers are interested in getting • financial advice at their workplace • about saving for retirement (up 11% from • the previous year) • 44% expressed interest in overall financial planning MetLife annual ee benefits trend survey

10. Australia Complete fee transparency 2006 Choice of Fund legislation, employees can choose any plan Asia Bundled and unbundled arrangements in China, India, HK UK Stakeholder pensions have a legislated “cap” on fees FSA requirement to disclose commission levels Chile “Ideal” pensions model but severe weakness was fees South Africa Government is concerned at the quantum of fees US Focus on fee disclosure and fee transparency DC “unbundling” highest degree of cost transparency Best in class providers for each function April : Financial literacy month Canada Insurance companies dominate, control investment manager access Fees primarily bundled, must be disclosed to members Offer externally and internally managed funds target date funds biased towards in-house funds Global ThemesInvestment independence and fee transparency

11. Global ThemesDC plan management best practices • Heightened scrutiny on plan governance/compliance • Maturing of DC market brings evolving standards and requirements • Change is happening fast • Duty to act in best interests of members • Mandated governance practices in Ireland, Netherlands • Voluntary Employer Engagement best practices released in UK, similar guidelines in Canada (CAP guidelines)

12. Global ThemesEmerging themes • What are consequences if DC (or DB) schemes do not deliver? • Increased taxes? • Government is getting more involved (UK, USA, South Africa) • Will people simply not retire? Will they all retire if returns are really good? • Lifecycle funds • Customised lifecycle funds – not off the shelf • Phase II? • Post-retirement phase • Huge development in post-retirement options • Annuities have never been popular so what will be popular now? • Savings beyond DC

13. www.mercer.ca