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Retirement Plans Around the World
Session 41

Moderator: Barry S. Blecher, Watson Wyatt Worldwide
Presenters: Tony Broomhead, Watson Wyatt Worldwide; Joshua D. Bank, Mercer
Recorder: Jeffrey B. Whittaker, Watson Wyatt Worldwide

The speakers presented an overview of trends in public and private retirement plans from around the world.

There is a worldwide trend away from defined benefit (DB) and into defined contribution (DC) in government provided statutory retirement benefits. Chile was one of the first countries to move toward DC in the 1980’s. Other countries to have moved to a DC or hybrid approach include Argentina, Mexico, Hong Kong, Austria, Taiwan, Korea, and Italy. It can be difficult to implement a pure DC approach in an emerging market economy with no established investment market or financing vehicles. To overcome social resistance to a pure DC approach, many countries provide guaranteed minimum benefit amounts or interest crediting guarantees.

In response to increased longevity, most countries have increased the statutory retirement age for receiving full benefits. The typical increase is from an age in the mid-60’s to an age in the late-60’s.

There has been a similar move away from DB in company-provided retirement benefits over the last twenty years in the more mature economies of Europe, Canada, Australia, and South Africa.

The speakers discussed financing and investment for private pension plans. In many countries, the tax advantage of unfunded plans is diminishing. This creates an incentive for employers to fund their retirement plans. Private retirement plans are growing rapidly in emerging market countries such as China, India, Brazil, and Eastern European countries. There is a trend in many countries towards increased plan governance.

The speakers compared retirement design trends among major industrialized nations: United Kingdom, Netherlands, Germany, and Japan.

Most UK DB plans are closed to new entrants, although many employees remain covered. The typical UK DB plan provides a benefit equal to 1/60 x service x 3-year final average salary, with 5-7% annual employee contributions.

In the Netherlands, the trend is toward career average plans with periodic adjustment of past benefits. A typical career average accrual rate is 2.00-2.25% of (salary less Social Security offset), with 4-5% annual employee contributions.

Until recently, most German retirement plans were unfunded, but there has been improvement in the ability to deduct employer contributions. There has also been a trend toward hybrid plans. Typical pay credits would be 2-4% up to Social Security Covered Compensation and 6-12% above. Most plans are non-contributory.

Japan implemented a new structure for DB plans in 2002. There are minimum benefit requirements for employees with 20 years of service. Funding rules were tightened. Hybrid plans were introduced. DC plans remain relatively unpopular due to poor investment returns and because no employee contributions are allowed.

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