The Future of International Pensions

July 13, 2016


This article was originally published in Executive Compensation Briefing, July 2016

Mark Lindsay, associate director within Elian’s  Performance & Reward Management division looks at recent trends in international pension provision.

Industry shift and its impact
Traditionally trustees and administrators of defined contribution international pension plans have looked after members’ pension pots and guided them through the accumulation stage of its growth with great diligence. Members have watched their pots grow, only to be surprised in a lot of cases that the amount accumulated in those pots does not provide sufficient income in retirement for them to maintain their chosen lifestyle. There are many reasons for such an outcome, including rises in bond yield rates, cost of living rises that are not reflected in the growth of the pension pot, poor performing investment assets and living longer.

Recently we’ve seen an industry shift within the defined contribution pension plan market, with the investment goal shifting away from wealth accumulation with no specific goal to targeting a desired income level for later life/retirement. This shift has brought uncertainty and increased risk relating to the financial outcome for beneficiaries.

In light of this, beneficiaries need to be asked a range of questions to reduce the uncertainty and risk to help plan for their future, such as:

  • How much do you need to earn to maintain your chosen lifestyle in retirement?
  • Are you currently saving enough to achieve your desired outcome?
  • How long do you need to save to achieve your outcome?
  • Is your chosen investment strategy sufficient to achieve your desired outcome within your chosen timeframe for drawing pension income?

New Approach
In some cases, members will have planned sensibly for their future with the help of advisors (who will experiment with different cash flow models), in an attempt to predict an outcome at, or around, the age the member wishes to retire. But many won’t have considered this. This outcome based financial model is something that Elian believes should be available to all members and is key to our Elian Income Replacement Plans.

Technological Solution With Relevant Advice
The financial modelling tool that Elian has developed allows members to look at and target an income level for retirement/later life based on many factors including attitudes to risk, the starting age, the age at which they want to start to drawing pension income, their contribution levels, their expectations of income and the number of years they will need that income for.

In addition, the technology will allow members to look at, along with their advisors, if the forecasted outcome is what they want and whether the assumptions that have been made using the tool is appropriate – and if not, to revise them. The tool will even allow the option to build in an allowance for another financial crisis occurring at some point during the period before the beneficiary wants to start drawing an income from the plan.

Once all the relevant factors, including model options have been fed into the modelling tool, the system will provide a guide to inform a member where on their journey to retirement they are and will prompt them to take remedial action where required. This action will consist of one of four options:

  • Do nothing
  • Pay in more money
  • Take more risk
  • Extend age at which they will draw down benefits

Types of International Pension Plans Available, Who Could Benefit
The Elian Income Replacement Plans set out below all utilise the outcome-based modelling tool as their engine.

pensions table

These plans will be attractive as pensions’ savings vehicles for a range of individuals from Channel Islanders to globally-mobile employees and executives of large multi-national corporations.

While the technology and these pension structures are already available in some jurisdictions, we do not believe that the combination of this quality of trustee and administration services and new outcomes based technology is available in the international pensions’ environment. This combination of services can provide the platform that individuals and businesses are looking for in a global marketplace to help incentivise and attract high calibre individuals to companies and to retain them.

Governance Key Going Forward
Complementary to the technological development is the evolution of the trusteeship and administration and the governance of defined contribution schemes that accompany this evolution. Governance has always played a major part but has only become key in the defined contribution environment in the UK recently.

The teams behind the technology play an important part in making this type of service offering work for the members and the sponsoring employer. Trustees and administrators that are knowledgeable about the governance requirements for these types of plan should prosper in an increasingly regulated international environment.

Today, individuals and/or their financial advisors require a level of knowledge and technology to enable them to plan towards their required level of retirement income with some certainty. We believe that a combination of experienced and knowledgeable trustees and administrators, along with the right technology offering can provide the additional degree of certainty that is required in a developing market.