Lessons for retirement systems: Insights from global practices

Countries around the world are implementing reforms to their retirement systems due to increasing demographic and economic pressures. A key driver of these reforms is human longevity. For example, the average retiree today can expect to spend about two decades in retirement, roughly double the time from 50 years ago.

As part of this demographic megatrend, fewer workers have access to defined benefit (DB) plans, which are centered around a consistent income stream in retirement. Instead, many save for retirement through defined contribution (DC) plans, which do not automatically convert into retirement income. Many of the reforms observed worldwide currently revolve around adapting to this shift from DB to DC plans to improve participant outcomes.

The TIAA Institute studied the experiences of seven countries, developing a framework for understanding how various factors affect different retirement systems. The goal was to identify the best ideas from these countries and use them to develop an actionable template for a well-designed retirement system of the future.

This study, titled “The future of retirement security,” analyzed seven countries, categorized into “individual choice” (IC) systems (Australia, Canada, the United Kingdom, the U.S.) and “collective choice” (CC) systems (Netherlands, Singapore, Sweden). The IC countries focus heavily on individual responsibility and personal choice in retirement planning. In contrast, the CC countries emphasize collective risk-sharing and limit individual choice to ensure broader, more equitable retirement outcomes.

Against this backdrop of increasing lifespans and the decline of traditional plan, here we explore the study’s insights and provide actionable recommendations.

Success of auto-enrollment

One of the most significant findings from TIAA is the success of auto-enrollment in increasing participation rates. In countries like Australia, New Zealand and the U.K., auto-enrollment has led to high participation rates, with opt-out rates remaining low. Australia even has a mandate whereby participants cannot opt-out. This has been instrumental in encouraging retirement savings among workers who might otherwise neglect it. In the U.K., the success of auto-enrollment and master trusts has doubled coverage rates among private-sector employees without imposing a heavy burden on employers. This model has helped ensure that more workers are saving for retirement, leading to better financial security in the long term.

Auto-enrollment addresses a key behavioral challenge: many employees want to save for retirement but are overwhelmed by the choices and decisions required to enroll. Automatic enrollment effectively addresses decision paralysis by making saving the default option, significantly boosting participation rates. In fact, studies have shown that automatic features like auto-enrollment and auto-escalation can increase retirement savings by up to 70 basis points.

Optimizing retirement savings accumulation

Two key factors are vital for optimizing retirement savings: maximizing inflows through contributions and employer matches, and investing savings in a manner suited to each worker’s needs. The Netherlands is often quoted as an example of a country with a high income replacement rate. What is less often mentioned is that it also has a very high total contribution rate to retirement savings — 37% including employer contributions. There is no way around it: those countries with higher replacement rates in retirement have higher contribution rates during their working careers.

Balancing choice and guidance

While choice is generally viewed positively, too much choice can be counterproductive. Many individuals, due to inertia or lack of confidence, fall back on default options. This makes the quality of these default options crucial.

Schemes can benefit from focusing on providing high-quality default options and simplifying investment choices. Singapore’s financial literacy test and phased benefit withdrawals, for example, provide flexibility while ensuring that participants are well-informed about their investment choices if they choose to self-manage their investments. Offering clear guidance and support can help participants make informed decisions without feeling overwhelmed by too many choices. Furthermore, the countries with high annuitization rates offer participants income as a first choice and give some options regarding timing or type of income.

The transition to hybrid plans

Globally, there is a shift toward hybrid solutions combining elements of DC and DB systems. Policymakers in the U.S., Australia, Canada and the U.K. are introducing more mandates and promoting lifetime income, while those in the Netherlands, Sweden and Singapore are allowing participants more individual choices.

Pension schemes should consider moving toward hybrid solutions that combine the flexibility of DC plans with the stability of DB plans to provide a more equitable model for risk-sharing between providers and retirees.

While there is no optimal one-size-fits-all approach, a hybrid system with the following features can combine the best elements of both DB and DC plans:

• Universal access to a high-quality retirement plan
• A contribution rate high enough to fund a secure retirement
• Risk sharing between participants, employers and governments to keep the system sustainable and equitable
• Flexibility and portability to align with evolving working patterns
• Strong fiduciary oversight, plan design and advice to help individuals make good choices

Addressing income adequacy and longevity risk

The TIAA study underscores the need for lifetime income solutions to ensure financial security in retirement. Countries like the Netherlands or Sweden have pioneered models that provide guaranteed lifetime income with variable levels, making it possible to temporarily adjust benefit payments if the system becomes unsustainable. This model offers an innovative approach to managing longevity risk and ensuring income adequacy.

According to Nuveen’s 2024 Global Institutional Investor Study, “Think EQuilibrium,” over 60% of DC respondents have or plan to offer a guaranteed income solution, while over half say guaranteed income solutions can improve retirement readiness. Enhanced account portability would make it simpler for participants to consolidate their savings, which in turn would make lifetime income options easier to implement, and perhaps further encourage adoption.

Summary of recommendations for pension schemes

Implement auto-enrollment:
Consider making auto-enrollment and autoescalation of contribution rates the default option to boost participation rates and encourage escalating retirement savings from the outset.

Simplify investment choices:
Offer high-quality default options and clear guidance to lower costs and help participants make informed decisions without feeling overwhelmed.

Encourage higher contributions:
Highlight the benefits of employer matches and tax incentives to maximize inflows and boost retirement savings.

Offer lifetime income solutions:
Develop and promote annuitization options to ensure stable income in retirement, combining guaranteed income with liquid assets for flexibility.

To read the report in full, please click this button:

Or go to this link: tiaa.org/public/institute/ publication/2024/the-future-of-retirement-security-an-international-comparison-th