Asset managers, plan sponsors, and policymakers must make appropriate changes to “industrialize” the pension industry to address post-crisis challenges, Ernst & Young's consultancy firm EY concluded in a report.
Industry experts and regulators should adopt global reforms to create a more robust pensions systems, it argued. The goal, according to EY, is to achieve financial adequacy and sustainability, maximized performance, efficient and effective retirement services, and long-term political backing.
“The challenges provide an opening to reshape retirement policy and pension regulations,” the report said. “They also offer substantial business opportunities and a chance to spur innovation.”
EY said pension systems must first manage benefit expectations, especially in relation to the financial health of the plan sponsor.
Consistent increases in longevity in tandem with “dwindling financial resources” are likely to burden pension systems, according to the consultancy. Such mismatch could be resolved by diligent and systematic rebalancing of expectations.
“The political agreement necessary to drive vital changes, particularly benefit reductions and ‘outsourcing’ outcome responsibility, will be difficult,” EY said. “Aligning diverse stakeholders with often conflicting interests and expectations is difficult for most short-term-focused political systems. However, most countries have little time to avoid a demographic earthquake.”
Plan sponsors and policymakers must also acknowledge stricter regulations, oversight, and transparency that are inherently linked to the risks pension markets may cause for economic stability, the report said.
To further “industrialize” the industry, EY argued that pension experts should improve “operational excellence” through cost reductions and more accurately defining retirement products. Plan sponsors should also take into consideration investment returns and participants’ needs in creating increasingly customer-centric plans.
“Policymakers and providers may need to consider the same strategic risks and opportunities that the banking industry experienced a decade ago when it commenced systematically handing information, and therefore power, to the customer,” the report said.
Other reforms included simplifying complex retirement systems to boost participant engagement.
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