Global defined contribution (DC) retirement savings regimes are failing to achieve their main goal, according to a new report.
The UK-based Defined Contribution Investment Forum (DCIF) study found DC schemes have piled up huge amounts of capital but those savings have not been converted efficiently into lifetime retirement incomes.
“This means that globally, governments have not solved the problem that they set out to solve; to alleviate the longevity burden that is being placed on the state and, indirectly, on employers,” the ‘Global comparisons of DC plan investment design’ report says.
Carried out by UK firm, Tor Financial Consulting, the DCIF study examined DC schemes in five jurisdictions including New Zealand, South Africa, Australia, the US and Chile.
While all the five DC regimes had to varying degrees been successful in “persuading or coercing to save for retirement”, none had come up with comprehensive decumulation solutions, the report says.
“The next big shift has to be to persuade retirees to be prudent when turning savings into retirement income and take more interest in where there retirement pots are invested; successful drawdown will require retirees to manage a dwindling resource in a complex and volatile environment,” the study says.
“Conversely, one of the trends highlighted in this report is that advice and guidance are not being bought or sought, despite the increase in choice available to savers.”
A twin-set of reports published last week by the NZ Commission for Financial Capability (CFFC) matched the DCIF results, finding little appetite for advice among the majority of New Zealanders.
One of the CFFC studies found 60 per cent of New Zealanders over 50 had never spoken with a financial adviser with only 21 per cent saying retirement was a trigger to do so.
Meanwhile, the DCIF report concludes the retirement savings advice gap is largely being filled in all of the jurisdictions it researched by default fund strategies. Robo-advice was also increasing, the study says, particularly in the US and Australia.
The NZ section of the DCIF report, compiled by Susan St John, University of Auckland associate professor, found KiwiSaver default asset allocation was the most conservative of global peers.
“Fees for KiwiSaver are at the upper third of comparator countries,” the study says.
According to the report, the collapse of the annuities market in NZ has encouraged a retiree drift to “conservative or guaranteed bank investments”.
The government may have to offer tax subsidies to reboot the annuity market with providers also needing to explore innovative retirement income solutions, the study says.
“A product is needed that gives a regular and stable income from lump sum saving and may include an equity share of housing,” the DCIF NZ section says.
Last week the Ralph Stewart-founded firm Lifetime Income Guarantee launched its long-awaited NZ variable annuity product.
DCIF is backed by a group of UK-based fund managers including Axa, Lazard, JP Morgan, MFS and Schroders.
Ex-pat Australian, David Harris, heads Tor Financial Consulting.