1. www.mercer.ca Global Defined Contribution Themes Implications for US policy May 2008 EBRI Policy Forum Barbara Marder, Worldwide Partner Global Defined Contribution Consulting Leader

2. 1 Mercer (Canada) Limited Global DC Themes “The world of retirement has changed and we live in a defined- contribution world now”*  US – Pension Protection Act  Canada – Ontario Expert Commission – Alberta/BC Investigation  Europe – Pan European developments – EFAMA Report : DC Schemes : Risks and advantages for occupational retirement provision  United Kingdom – Regulatory push for improved DC governance – Cessation of DC contracting by 2012 – Statutory requirement to provide DC projections annually – 2012 Personal Accounts  South Africa – Holistic review of retirement funding and social security  China – Enterprise Annuity  Hong Kong – Proposals :  Voluntary MPF contributions  Choice of MPF Trustee  Indonesia – 2008 DB funding requirements may lead to more DC conversions  Thailand – DC legislation expected 2008/9  Australia – Tax incentives – Looking to simplify – ease of consolidation  Chile – Realization that cost structure is too high * Karen Salinaro, IBM's VP of Benefits and Compensation

3. 2 Mercer (Canada) Limited Global Themes The world is flat!  Will DC schemes deliver?  Benefit adequacy concerns: – Contributions insufficient (often less than DB)  Or not even enrolling – Returns are too low:  Poor asset allocation – too conservative  “switching” – Fees are too high  Focus on expenses – Poor investment performance  Insufficient focus on managers

4. 3 Mercer (Canada) Limited Global Themes The world is flat!  Societal view: – DC funds transfer risks to the group least capable of managing them – Government has increased its attention to these issues Retirement Services Roundtable – Cracking the Participant Code

5. 4 Mercer (Canada) Limited Global Themes The world is flat! Additional concerns:  Member engagement  Member education/financial literacy  Leakage through pre-retirement withdrawals and borrowing  Cyclical retirements  What happens at retirement? – “good bye and good luck”  Longevity risk, what’s that?  Governance – who is overseeing DC plans?

6. 5 Mercer (Canada) Limited Global Themes DC Investments  Desire of participants to “delegate” decision making to a third party – Trend to reduce the number of funds offered – European DC survey: Plans offer 15 investment funds on average. 75% of plans offer a default option, used by 70% of members – UK DC survey: Median no. of funds offered in contract-based plans is 52. 85% of plans offer a default option. – Lifecycle/lifestyle/target age/target date funds are universally popular (but, surprisingly, not in Australia) and a common default option  Prediction that $920 billion will flow into these funds over the next 5 years.  Prediction that 75% of all 401(k) assets will be held in target-date funds within 5 years  Custom life cycle funds are gaining traction at the large end of the market  Alternatives are creeping into DC plans, usually as a “bundle”  Increasing desire of plan sponsors to delegate authority to third party

7. 6 Mercer (Canada) Limited Global Themes The world is flat! Or is it? UK/North America  Target date/ lifecycle funds – PPA (USA) – UK age-based/US target year  Rationalization of investments  Enormous focus on fees – Full disclosure  Inertia accepted as a reality  Save more tomorrow  Conventional assets, fixed asset allocation  Annuitization (UK)  Strong employer role Australia/Hong Kong  Few options – Generally balanced/target risk  Target date/lifecycle unpopular – Disengages employees? – Inappropriate near retirement – Age is too simple a factor  Alternative assets, dynamic asset allocation, diversification (Australia)  Strong focus on communication, education  Strong influence of financial planners  Lump sum payments only (Australia)  Employer role is marginalized In reality responses will differ due to regulatory regimes But some global convergence is likely

8. 7 Mercer (Canada) Limited Global Themes Lessons from Australia (most mature DC market)? Environment is different:  Compulsory membership and contributions  Lump sum on retirement  Master trusts Lessons?  Even if target date in place need for engagement/communication  Target date models can be improved – Why should DC schemes have “simple” investments? – More thought to be put into near retirement lifecycle offerings  Financial planning community has a strong influence

9. 8 Mercer (Canada) Limited Global Theme - DC Communications/Member Engagement - Where does communication end and financial planning begin? - Will automation be the real answer? Generic Communications Financial Planning Targeted Communications: Personalized and/or Participant segmentation Financial Education Provided by 3 rd party Employer-sponsored Education seminars 49% of workers are interested in getting financial advice at their workplace about saving for retirement (up 11% from the previous year) 44% expressed interest in overall financial planning MetLife annual ee benefits trend survey Managed accounts

10. 9 Mercer (Canada) Limited Global Themes Investment independence and fee transparency  Australia – Complete fee transparency – 2006 Choice of Fund legislation, employees can choose any plan  Asia – Bundled and unbundled arrangements in China, India, HK  UK – Stakeholder pensions have a legislated “cap” on fees – FSA requirement to disclose commission levels  Chile – “Ideal” pensions model but severe weakness was fees  South Africa – Government is concerned at the quantum of fees  US – Focus on fee disclosure and fee transparency – DC “unbundling”  highest degree of cost transparency  Best in class providers for each function – April : Financial literacy month  Canada – Insurance companies dominate, control investment manager access – Fees primarily bundled, must be disclosed to members – Offer externally and internally managed funds  target date funds biased towards in-house funds

11. 10 Mercer (Canada) Limited Global Themes DC plan management best practices  Heightened scrutiny on plan governance/compliance – Maturing of DC market brings evolving standards and requirements – Change is happening fast – Duty to act in best interests of members  Mandated governance practices in Ireland, Netherlands  Voluntary Employer Engagement best practices released in UK, similar guidelines in Canada (CAP guidelines)

12. 11 Mercer (Canada) Limited Global Themes Emerging themes  What are consequences if DC (or DB) schemes do not deliver? – Increased taxes? – Government is getting more involved (UK, USA, South Africa) – Will people simply not retire? Will they all retire if returns are really good?  Lifecycle funds – Customised lifecycle funds – not off the shelf – Phase II?  Post-retirement phase – Huge development in post-retirement options – Annuities have never been popular so what will be popular now?  Savings beyond DC

13. www.mercer.ca