How can we save for our future

How We Can Save (for) Our Future June 2018

World Economic Forum® © 2018 – All rights reserved. This white paper has been published by the World Economic Forum as a contribution to a project, No part of this publication may be reproduced or insight area or interaction. The findings, interpretations and conclusions expressed herein are Transmitted in any form or by any means, including a result of a collaborative process facilitated and endorsed by the World Economic Forum, but Photocopying and recording, or by any information Storage and retrieval system. whose results do not necessarily represent the views of the World Economic Forum, nor the entirety of its Members, Partners or other stakeholders. REF 250418

Contents 1. Foreword 2. Introduction 3. Best practice plan design features 4. Recommendations for policy-makers and system providers across the globe 5. Case study: US retirement system – current situation, challenges and recommendations 6. Acknowledgements 7. Endnotes How We Can Save (for) Our Future 3

4 How We Can Save (for) Our Future

Foreword Richard Samans The challenges to provide ageing populations with a financially secure retirement are well known. Head of the Recent trends in retirement system design and changing workforce dynamics mean individuals are Centre for the taking more responsibility and risk to achieve adequate incomes in retirement. At the same time, many Global Agenda individuals do not have easy access to retirement savings vehicles. Society must ensure retirement Member of the systems are inclusive and sustainable, and provide adequate income for all. Achieving this balance is Managing Board challenging but lessons can be learned from successful systems around the world. Michael Drexler This White Paper has been produced as part of the World Economic Forum Retirement Investment Head of Financial Systems Reform project, which has brought together pension experts to assess opportunities and Infrastructure for reforms that can be adopted to improve the likelihood of retirement systems adequately and Systems sustainably supporting future generations. The issues and findings discussed are the result of Member of numerous interviews, discussions and workshops. the Executive Committee With this in mind, we thank Mercer, our project partner, as well as our Steering Committee and Expert Committee for their input, which has allowed us to draw on expertise from different communities and knowledge networks. How We Can Save (for) Our Future 5

Introduction Retirement systems worldwide are currently under strain. Key challenges facing retirement systems include: While examples of progress made to improve systems are numerous, further reforms are required in many parts of – Greater longevity, resulting in higher levels of savings the world to ensure they are sustainable, inclusive and able required to sustain longer lifetimes and ageing to provide future generations with financial security in their populations, putting a strain on the sustainability of pay- retirement. as-you-go systems – Increasing responsibility for individuals to ensure Over the last two years, the World Economic Forum has adequate retirement income, largely driven by trends been working with experts from around the world to assess among governments and employers to move away from the challenges facing retirement systems globally (covered traditional defined benefit (DB) systems towards defined in the 2017 White Paper, “We’ll Live to 100 – How Can contribution (DC) systems. Also, trends in labour markets We Afford It?”) and exploring the solutions that can be are resulting in less traditional employment patterns and implemented to close the savings gap (focused on in this more contingent and self-employed workers who are paper). unlikely to have access to employer-facilitated plans – Low levels of savings by individuals The retirement savings gap is a global challenge – Poor financial literacy in an environment where responsibility has shifted to individuals The magnitude of the global retirement challenge was – A lower expected investment return environment, highlighted in the previous paper, in which the shortfall in placing more importance on the level of contributions pension savings (the retirement savings gap) for the eight – Lack of access to savings vehicles – one of the biggest largest pension markets was estimated at $70 trillion. While barriers to saving for retirement. improvements in longevity should be celebrated, longer lifetimes are ultimately increasing the cost of retirement, and hence the savings gap is projected to increase significantly. If measures are not taken to increase overall levels of savings, this gap is projected to grow to $400 trillion by 2050. Figure 1: Size of the retirement savings gap, 2015-2050 (trillion $) 6 How We Can Save (for) Our Future

Figure 2: Challenges facing global retirement systems Source: Based on World Economic Forum, “We’ll Live to 100 – How Can We Afford It?”, Figure 3 What can be done to close the gap? This White Paper includes findings on techniques that system providers (i.e. governments and employers) can The trend away from traditional DB and towards DC use to close the savings gap, from increasing coverage to systems includes a significant shift in risk ownership from adopting digital financial systems. Given that the retirement the traditional providers, governments and employers to savings gap is largest in the United States, a case study is individuals. Given this trend, this paper focuses on the included on the challenges facing US retirement systems solutions DC retirement systems can implement to improve and the lessons that can be learned from various countries. retirement security. This paper concludes with recommendations for policy- makers and plan providers for closing the savings gap and A key finding in the first paper was that expanding access improving retirement security. to retirement savings vehicles is one of the most effective means to address the global retirement crisis. Without easy access, and in the absence of auto-enrolment or mandates, individuals are less likely to save. While ensuring that individuals have access to the tools needed to plan for retirement is important, effectively engaging them to participate in the first place is critical. In addition, financial innovation is necessary to make sure that savings can be invested in low-cost products that can produce a stable and sufficient retirement income. How We Can Save (for) Our Future 7

Best practice plan design features The following three key principles have been identified to that individuals trust their employers more than third-party make progress towards financial inclusion and improved providers. Using employers to encourage individuals to retirement security: save for retirement is one of the most effective means of expanding access. A. Expand coverage to more individuals – Employer-facilitated plans Considerations for employer plans: – Low-income populations – Women – Maximize the role of the employer: Mandatory B. Leverage technology to increase levels of savings compliance has been used effectively around the world C. Structure pension systems to provide incentive to to require employers to provide retirement savings improve participation plans. Where there is cultural sensitivity to mandating – Use automatic design features to help improve compliance, moving to automatic enrolment with an retirement outcomes “opt-out” option as opposed to an “opt-in” approach has – Address the need for emergency cash proven to be quite effective as well. It is important to bear in mind that no one-size-fits- Research shows a discrepancy between the reasons all solution exists when designing retirement systems. individuals give for not participating in savings plans and Regional, political and cultural attitudes provide many what their employers think are the reasons. The business differentiating influences. This section is intended to serve leaders believe that employees are not participating in as guidance and to highlight the importance of remaining savings plans due to the lack of awareness or visibility of the 4 mindful of the intended audience and the regulatory plan, while individuals claim it is due to affordability. framework in which the system is created. – Encourage participation: Allowing employers to A. Expand coverage to more individuals contribute independently, or to match employees’ contributions, has been shown to encourage Many individuals in both developed and developing markets participation and will improve adequacy. When still lack easy access to pension plans and saving products. businesses contribute to retirement plans, full-time In many cases, options are available but take-up is low. employees are more than twice as likely to contribute The lack of opportunity to begin saving and the lack of themselves as opposed to employees in businesses that encouragement to develop savings habits severely limit do not contribute.5 many people’s ability to accumulate sufficient retirement savings. Recently released research from Mercer shows – Find ways to include contingent and informal that, globally, only 25% of individuals are confident they workers: These types of workers are least likely to have can save enough for retirement, and two-thirds do not ever access to a traditional workplace savings plan. And expect to retire.1 the group of workers with non-typical working patterns and non-traditional employers is growing. In addition, Ensuring that all individuals have access to retirement more workers are moving to and from informal/gig work savings vehicles is key to reducing the savings gap. throughout their careers, which disrupts regular saving Systems need to ensure that marginalized groups (e.g. self- habits. employed, contract workers, informal workers, disabled, low-income) have easy access to the tools needed for a Low-income populations financially secure retirement. Low-income populations are focused on short-term Employer-facilitated plans expenditures and can experience significant income volatility, making it difficult to save regularly, especially for Using America as an example, approximately 50% of the long term. Research shows, however, that these groups workers in the private sector do not have access to an do save, but in less conventional ways. 2 employer-facilitated retirement savings plan. In addition, those working at smaller companies, where regulation and Considerations for low-income groups: cost may make providing a plan overly burdensome for employers, are also at a disadvantage. – Encouraging long-term saving, even if for small amounts. While purchasing annuities to provide a Employer-facilitated plans can have a big impact on guaranteed lifetime income should be encouraged, it retirement savings; research shows individuals are 15 may not always make sense for those with very small times more likely to save if their employer offers a plan.3 fund balances. A modest account balance that may be Mercer’s Healthy, Wealthy and Work-wise research shows too small to annuitize at retirement can still be used to delay drawing social security benefits by a number of years. This delay could materially increase retirement income for many people. 8 How We Can Save (for) Our Future

– Encouraging emergency savings for the short and Women face an unequal playing field. Because most medium term to help low-income groups avoid high people set savings aside during their working years, women fees on short-term credit for unforeseen emergencies or are at a disadvantage as they participate in the workforce for the need to use their retirement savings early. fewer years than men on average. Women are more likely to leave the workforce to start a family or to care for sick – Bearing in mind that a proportion of retirement relatives, for example. The gender pay gap, coupled with security should be insurance/protection for big the type of jobs typically held by women, means their annual impact events and a guaranteed basic standard of living incomes are less than men’s on average. A direct result is (in places where it is not provided elsewhere by social that women will save less during their working lives and will protection systems). also receive lower matching contributions from employers (if they receive anything at all). Finally, research indicates that – Where social security benefits are means tested against women tend to be more risk averse and are less confident asset limits, examining the fact that people saving about their financial security in retirement then men.6 As a for retirement may receive reduced social security result, women are less likely to choose aggressive growth- benefits, which can be a huge deterrent to saving. targeted strategies and may miss out on opportunities for long-term growth of their retirement savings. Women Actions to close the gender pension gap: Women face a perfect storm of challenges when accumulating retirement savings. They earn less than – Recognize our differences: Retirement planning will men, contribute for fewer years, live longer and are more be different for women and men given the different conservative in their asset allocation. In the European life cycles. If women follow the same retirement plan Union, the difference in retirement balances at retirement is as men, they will fall short in retirement. Retirement estimated to be 37% lower for women on average, which system providers should target women differently, giving is striking even versus a gender pay gap of 16%, based on them confidence to handle their finances and consider the latest data collected from Eurostat, EU-SILC. Figure 3 different investment strategies. Most importantly, shows the range of the gap across the 28 EU countries, employers must address the underlying pay gap, as with the bars representing the five largest countries by that drives both lower savings amounts as well as lower population (Germany, France, UK, Italy and Spain) as well as accumulated pensions at retirement due to the power of a breakdown of the effect of career breaks and lower returns compounding. due to asset allocation in contributing to the greater pension gap. – Acknowledge time spent out of traditional workplaces: Governments and employers should Women need more money for retirement. They live longer consider ways to recognize the time individuals (both than men on average, hence spend more years of their male and female) take out of the traditional workforce lives in retirement, and so they must target a higher level to contribute towards society (e.g. pension credits of savings than men to achieve the same level of annual or increases in social security benefits) and remove income throughout their retirement. In addition, women any structural barriers to catching up on lost years of typically spend more on healthcare (approximately 7% a contributions (e.g. tax limitations). year in the United States) and are more likely to require professional caregivers. Figure 3: Gender Pay Gap vs. Gender Pension Gap Source: Eurostat, EU-SILC, 2016 data and World Economic Forum analysis 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Pay GapIncreased Gap due to Career Increased Gap due to Lower Retirement Balance Gap Breaks Returns How We Can Save (for) Our Future 9

– Be prepared for future disruption: The Fourth Industrial Progress: A number of initiatives over recent years have Revolution is expected to disproportionately affect attempted to increase savings rates for Mexicans. women. Governments and employers should understand how workforces are expected to evolve, and identify jobs 2015: Possibility to make voluntary contributions at risk of technological disruption and any associated to existing Pension Fund Administrator accounts at opportunities for reskilling and adjacent careers. common retail outlets, including 7-Eleven stores, as well – Encourage financial inclusion and independence: as branches of a development bank and a state-owned Many women around the world rely on their husbands to telecommunications and financial services company handle the finances and provide retirement incomes. In 2016: Possibility to open a basic bank account through many developing countries, the problem is more acute a mobile phone payment platform with only a mobile as many women do not have access to the financial phone number, and to make deposits in a Pension system. Governments should ensure easy access to Fund Administrator account by sending an SMS (short banking and savings products, perhaps using advances messaging service). No fees are charged and no in technology (e.g. digital national IDs and mobile smartphone is required. banking), to reach under-served pockets of society, including women. Unique personal identification (ID): Digital IDs are an B. Leverage technology to increase levels of savings essential part of creating a financial inclusion ecosystem. Unique personal IDs enable individuals to more easily Digital transformation benefits manage their savings and financial accounts, avoiding fragmentation, as well as lost monies and accounts. Technology can play a key role in expanding access and Providers are better able to target benefits (e.g. subsidies encouraging participation in retirement savings tools. or credits) to the groups of society that need them the Research shows that individuals are seeking secure, easy- most. This element can be particularly important for informal to-use technology to help them manage their personal economies with many low-income workers, those moving 7 between the formal and informal sectors and those who finances. Older populations have the same desire for online tools, with 90% of adults under the age of 35 and 85% of all take time out from the workforce (e.g. individuals with adults reporting they want digital help. irregular work patterns and those taking time out to raise children or care for family members). In countries with well- Four billion mobile phones are in use globally. Using a established systems, introducing a unique identifier (e.g. a mobile phone to easily set up and contribute to savings national ID number or biometric ID) can support the mobility vehicles has benefited individuals in developing economies of savings accounts across employers and geographies. such as Kenya. There, a bank-by-phone system is very Allowing savings from various sources to be consolidated popular, such that currently the majority of previously significantly reduces the administration burden on both unbanked adults are able to save and transfer money using individuals and administrators to manage multiple savings their mobile phone. accounts. Spotlight on Biometric ID in India Spotlight on Mexico’s digital transformation to expand access A biometric ID has been introduced in India. For some individuals in the informal sector and those without jobs Issue: A large number of Mexican workers are not (e.g. female homemakers), this is their only form of ID. engaged in retirement savings. Due to high levels of The national ID is paired with a pension system to expand informal work, nearly 60% of the working population access to workers in the informal sector by automating is excluded from the mandatory pension system. It is the creation of pension accounts. estimated that the old-age poverty rate in Mexico is above 30% and that only 29% of the elderly population This digital framework overcomes many of the barriers (65 years and older) have a pension. For those who individuals face when trying to access a retirement do participate, replacement rates (retirement income savings system. Two of the system’s key benefits are that versus pre-retirement income) are very low due to low no paperwork is required and individuals do not need contribution rates and the time spent in the informal to visit a physical bank branch to set up an account. In workforce. Half of the formal workers in Mexico have not addition, contributions can be received from a variety of even thought about their retirement income.8 sources, including government incentives, micropayment plans and third parties. Opportunity: Mobile phone usage has been identified as being more effective to increase participation in retirement Secure financial ecosystems: To embrace technology savings than access to the internet or computers. In and innovation, safe digital financial systems must be 2013, 99.9% of Mexicans had a mobile device, while, in created, which protect and engage individuals. Systems 2015, fewer than 50% of households had access to a need to be safe and secure for individuals, protect computer or the internet. consumers’ privacy and be cost-effective and simple to implement. A regulatory oversight framework should be in place to address cyber-risk, ensure proper use of data and promote best practices. 10 How We Can Save (for) Our Future

Figure 4: Willingness of individuals to allow an online app to hold personal data to help manage their finances, by age group Source: Mercer, “Healthy, Wealthy and Work-wise – The New Imperatives for Financial Security” 80% 80% 73% 62% 52% 46% 43% 37% 29% 18% 11% 14% 18-24 25-34 35-44 45-54 55-64 65 and over Willing Not Willing Figure 5: 93% of individuals aged under 35 are interested in online financial tools but they must be credible and secure Source: Mercer, “Healthy, Wealthy and Work-wise – The New Imperatives for Financial Security” C. Structure pension systems to provide incentive to Automatic design features to improve retirement improve participation outcomes A number of tools are available to system providers and Using automatic features can significantly increase individuals to help close the savings gap. First, encouraging individuals’ retirement income; many retirement systems individuals to start participating in savings plans earlier around the world have successfully adopted this approach. is expected to have the most dramatic effect on closing Automating the enrolment process by opting participants the savings gap. Second, increasing levels of savings into a plan by default, but allowing them to opt out if they should significantly improve retirement outcomes. Third, do not want to participate, can lead to participation rates in discouraging or preventing individuals from drawing their excess of 90%. Auto-enrolment simplifies the participation savings early is also a key driver to improve retirement process for individuals by reducing the required paperwork security. and the number of decisions to be made. Retirement outcomes can be further improved by adding techniques to automatically re-enrol participants who previously opted out, and by automatically increasing contributions at an agreed-upon rate. How We Can Save (for) Our Future 11

Considerations for automatic enrolment: Impact of enrolling individuals automatically – Auto-enrolment has proved successful in increasing Plan providers can adopt automatic enrolment to simply participations rates, but the approach relies upon enrol employees into plans. This tactic avoids burdensome an individual’s inertia. This comes with the risk that paperwork and individuals making proactive financial participants are not engaged in retirement planning and decisions. While some systems are mandatory, many will be less likely to take the time to understand and pair auto-enrolment with an opt-out feature to ensure appreciate the benefits they are entitled to, potentially the individual retains the choice to participate. Adopting leading to poor decisions down the line. automatic enrolment is estimated to increase retirement income by 33% when compared to voluntary enrolment, – Plan providers must ensure individuals are not given assuming individuals reduce consumption to fund a false sense of security when they are automatically contributions to a retirement savings plan. enrolled in a retirement savings plan. Individuals need to understand that they may need to contribute additional Impact of increasing contributions automatically savings, in addition to the default contribution rate, to meet their expectations for retirement income. Taking this a step further, systems can build in automatic increases that gradually raise savings levels (“optimized – Automatic techniques have the most impact when automatic enrolment”). This increase could be a percentage individuals are engaged and understand the need to pre-programmed to increase after a certain number of save. Pairing auto-enrolment techniques with financial years or perhaps tied to life events or promotions and pay education will help individuals make better decisions and increases. start saving earlier and at higher contribution rates, with reduced plan leakage. Behavioural economics studies show that individuals often make poor decisions when the outcome has an immediate – Attention should be paid to the source of the additional effect on their lives, for example what to eat for lunch, savings; auto-enrolment is effective when additional whether to exercise and, more importantly, how much to savings come from reduced consumption and are not save today. However, some studies show that people are funded by an increase in consumer debt. better at making sensible decisions for future events, largely because those decisions do not have an immediate effect. Figure 6: Wealth at retirement can be 70% higher when using automatic techniques coupled with leakage prevention 9 Source: Employee Benefit Research Institute (EBRI) analysis, Retirement Security Projection Model® MULTIPLES OF EARNINGS AT RETIREMENT (e.g. account balance/wage at retirement) 9 8 9% All three higher techniques 7 18% higher combined increase 6 wealth at 33% higher retirement 5 by 70% 4 3 2 1 0 Voluntary enrolment Automatic enrolment Optimized automatic Optimized automatic enrolment enrolment with no leakage 12 How We Can Save (for) Our Future

For example, certain people may be unwilling to increase Combining these three techniques – auto-enrolment, their current contribution rate to a savings plan today, but auto-escalation and preventing leakage – is expected to they may be willing to agree to an increase that occurs in the increase wealth at retirement by 70%. future (e.g. to coincide with future pay increases). Retirement systems can pre-programme an individual’s retirement plan Impact of saving earlier to increase savings over time (e.g. auto-escalation). When contributions are automatically increased from 6% to A key challenge is that many people delay retirement 10%, an individual’s wealth at retirement could be 18% savings until they are in their 40s or 50s. Although saving greater, assuming individuals reduce consumption to fund early in one’s career, when the earning potential is lower and increased contributions. projected expenditures are higher, is inherently difficult, the idea of starting early to build the “savings habit” is important Impact of preventing individuals from accessing their even if it is at a lower savings rate initially. It is not that retirement savings early people are deliberately delaying retirement planning but that, at each life stage, more immediate financial considerations Once savings begin to accumulate, the next challenge for come first. individuals is to refrain from dipping into their retirement savings. Unfortunately, many savings intended for retirement At this point, retirement may be 10-20 years away. Typically, do not last until retirement; sometimes they are drawn for in developed countries, many workers in their 20s will be medical emergencies or critical housing repairs, or during directing available monies towards other priorities, such periods of unemployment. Preventing individuals from as paying off student debt or saving for a deposit to buy a accessing their funds prior to retirement can improve home. In their 30s, priorities shift towards starting families or outcomes a further 9%. However, some individuals paying a mortgage, and retirement feels like a long way off. will be dissuaded from participating in long-term savings plans if they cannot access their funds early. Considering Investing money earlier provides opportunities to benefit emergency savings accounts, for example, could help from the fact that investment returns are reinvested and address this issue. have the potential to also earn investment returns, which can significantly improve retirement outcomes. Figure 7: Wealth at retirement can be significantly lower when savings are delayed by just five years Source: Authors, based on Employee Benefit Research Institute and Mercer analyses MULTIPLES OF EARNINGS AT RETIREMENT (e.g. account balance/wage at retirement) 6 26% higher than base case 5 18% lower 4 than base case 3 50% lower than base case 2 1 0 Base case Impact of delaying Impact of delaying Impact of working saving 5 years saving significantly 5 years longer Contributes 6% Contributes 6% Contributes 6% Contributes 6% p.a. from age p.a. from age p.a. from age p.a. from age 27 to age 65 40 to age 65 22 to age 70 22 to age 65 How We Can Save (for) Our Future 13

Figure 8: Wealth at retirement can be significantly higher when savings start earlier in life Source: Authors, based on Employee Benefit Research Institute and Mercer analyses The analysis using the Employee Benefit Research Institute’s The need for emergency cash Retirement Security Projection Model shows that delaying retirement savings just five years, During the accumulation phase, retirement funds can be at age 27 instead of 22, results in a retirement account lost when individuals access their savings early. Unforeseen 18% smaller. If retirement savings is delayed until age events, such as job losses or medical expenses, result in 40, the balance is half the size. On the flip side, delaying early withdrawals from retirement accounts in the United retirement until age 70 instead of 65 and continuing to States. Approximately half of funds invested by those under 12 contribute results in an account balance that is 26% larger the age of 55 are leaked out and are not repaid. at retirement. Some individuals are reluctant to set money aside for their Impact of saving at different times in life retirement if they cannot use that money for emergencies. Many Americans have inadequate access to emergency Comparing three individuals who each contribute for 25 funds. Almost half (46%) of individuals would not be able years but who save at different periods of their lives shows to pay a $400 expense without selling something or that the retirement outcomes depend significantly on the borrowing money. Half of Americans find it difficult to pay ages at which they contribute. This differential is due to monthly bills and less than 50% have set aside emergency both the length of time contributions are invested and the or rainy day funds to cover expenses for three months, in difference in the size of contributions made (a function of case of sickness, job loss, economic downturn or other 13 salary). emergencies. This analysis shows that retirement outcomes are Access is not just a problem for low-income workers; many significantly better for individuals who start saving earlier, medium-to-high income earners have poor budgeting skills even with significant breaks in contributions or the individual and consume all they earn each month. This behaviour can stops contributing at an earlier age. This analysis is not be witnessed across income and age spectrums. intended to promote interruptions to contribution payments or recommend ceasing to contribute earlier in life, but to demonstrate the benefits of compound interest on savings made earlier in an individual’s lifetime. 14 How We Can Save (for) Our Future

Figure 9: American’s financial capability Source: Based on Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S. Households in 2015, 2015 National Financial Capability Study 60% 40% 20% 0% Do not have any Cannot cover Cannot cover retirement savings a $400 expense 3 months expenses One solution is to encourage individuals to set aside Many retirement systems allow individuals to take some emergency savings, separate from retirement savings, for or all of their retirement savings as a lump sum. A balance hardship and medical circumstances. Separation from needs to be found between giving individuals freedom to retirement savings is crucial, given the concept of mental use their funds as they need, and helping them to make accounting (see “Spotlight on financial mental accounting”). their savings last throughout their retirement. Governments Research shows people are less likely to withdraw funds if can limit the amount taken as a lump sum. This restriction separated into different accounts, and are also less likely to has been implemented in Singapore, where individuals can overspend on emergencies. only take a lump sum if the remainder of their savings can provide a certain level of lifetime income. In addition, carefully applying penalties on withdrawals that are not paid back or making withdrawals conditional on certain situations can deter individuals from dipping into their retirement savings accounts. How We Can Save (for) Our Future 15

Spotlight on financial mental accounting Soman and Cheema (2011)14 A group of low-income manual workers in India were involved in a study on the concept of mental accounting. The study analysed the impact of imposing savings targets and partitioning savings. Each week, the workers were given cash savings from their wages in envelopes. The group of employees was split into four sample groups and savings were recorded over a 14-week period. Half of the group was given a low savings target (40 rupees a week) and half a high savings target (80 rupees a week), representing 6% and 12% of their weekly income, respectively. These levels of savings were significantly higher than the workers’ current levels of saving. Each of these groups was then split into two groups to reflect different delivery models. One group received cash savings in one envelope and the rest received savings split equally into two envelopes. Low savings target High savings target 40 rupees 80 rupees Cash savings delivered in one 40 80 envelope 20 40 Cash savings delivered in two envelopes 20 40 Results: Partitioning savings had a significantly positive impact on the level of savings: Total savings (rupees): Low savings target High savings target 40 rupees 80 rupees Total savings when cash delivered 269 211 in one envelope Total savings when cash delivered in two envelopes 373 456 When individuals mentally separate money, it affects their financial decision-making. Those receiving their savings in two envelopes were more conscious of their saving targets and better resisted the temptation to spend their savings, especially the savings in the second envelope. As a result, those whose savings were separated into two envelopes were less likely to spend the savings from their second envelope and saved significantly more than those receiving savings in one envelope. This suggests that the concept of mental accounting has some influence on how likely people are to spend their savings and how much of their savings they will spend. Separating savings for the short term (e.g. emergencies and unexpected life events, such as home/motor repairs, medical bills or temporary unemployment) from longer-term savings can help individuals to budget and to avoid overspending when dipping into their savings. 16 How We Can Save (for) Our Future

Recommendations for policy-makers and system providers across the globe Closing the pension savings gap requires cooperation from – Increase savings levels and reduce leakage for governments, employers and individuals. While efforts emergencies: Access to separate emergency savings are being made around the globe to improve retirement can encourage participation and help to manage systems, lessons can be learned from others’ experiences leakage from retirement savings accounts. It should be as action is taken to reshape the future of long-term made easy for private-sector organizations to create savings. plans, particularly those allowing employers to match employees’ contributions (or at least contribute). – Make systems inclusive: The pillars of a pension system should be coordinated holistically to meet – Increase participation: Encouraging auto-enrolment the needs of all individuals and provide support for and providing incentives for individuals and employers marginalized groups. will increase participation. – Create a harmonized framework of regulation and – Educate and reach out: Educating individuals about political accountability: Many countries’ retirement the programme will encourage participation and build systems are organized in a multi-pillar framework, confidence in the system. Also connecting with and usually resulting in the involvement of many different educating employers will help secure their engagement ministries, government agencies and other organizations. in the programme, especially in the rollout phase. Responsibility is typically split across government departments, and often a holistic vision is lacking. – Guarantee participant protection: It is important to Governments must take responsibility to understand their ensure providers and products meet a set of standards population’s retirement savings needs, ensure retirement before allowing them entry into the market. systems have clearly stated objectives or goals, and measure and monitor the metrics on a regular basis. – Close inequality gaps: The focus should be on increasing contribution density, not just on contribution – Design plans that are easy to implement and rates. System providers should allow those who low cost: Systems should be simple and cheap have had gaps in contributions to make catch-up for governments and employers (especially small contributions, and reduce or eliminate vesting periods, businesses) to implement, and low-cost plans should be the waiting periods during which they are employed but designed with frictionless processes for employers and not yet allowed to join the employer’s pension plan, to employees. allow participants to contribute sooner. Governments can offer pension credits or income replacement payments – Invest in digital transformation: Governments should for those with periods out of the workforce (caregivers, invest in digital transformation to provide an infrastructure the disabled, parents raising children, individuals who that is accessible and affordable to promote digital experienced periods of sickness or unemployment, etc.). financial services among underserved populations. – Ensure portability: Accounts should be portable across employers/regions where possible; portability is particularly important in developing countries with large informal labour markets. How We Can Save (for) Our Future 17

Case study: US retirement system – current situation, challenges and recommendations Retirement systems face a host of challenges globally, 3. Individual savings: Many Americans are not saving including in the United States, where the retirement savings enough. gap is the largest in the world. The gap was estimated at – While voluntary savings vehicles, such as individual 15 approximately $28 trillion in 2015 across the three pillars retirement accounts (IRAs), can help workers (public pensions, occupational pensions and individual accumulate savings, research shows that they are savings) and it is expected to widen to about $137 trillion by not being used; less than 10% of workers regularly 16 19 2050, largely as a result of the effects of improvements in contribute to an IRA. life expectancies. Given the significance of the United States – Even when individuals do accumulate retirement in terms of size of the global savings gap, this case study savings, the leakage out of savings vehicles is focuses on the challenges and suggests recommendations substantial. For each $1 saved for retirement, roughly 20 for policy-makers. 40 cents is leaked out through early access. Two factors contribute to individuals accessing their Research suggests that many Americans are not prepared retirement savings early. First, many plans allow for retirement; an estimated 90% do not have enough saved people to withdraw funds prior to retirement with no for retirement. In particular, roughly 30% of Americans have requirement to pay the funds back later. Second, not even begun saving for retirement.17 individuals are not deterred by the plans that may impose a penalty on early withdrawal, choosing to Key drivers of the savings gap in the United States: use their retirement funds for other purposes prior to retirement. 1. Policy changes at the federal level: Past In response to this challenge, several US states are administrations have attempted to reform the retirement reforming their retirement systems. Their focus has been on system but have largely been unsuccessful. expanding coverage, particularly for private-sector workers in small businesses. Across the United States, these states 2. Occupational plans: Nearly half of American private- are experimenting with various models to increase access sector workers (around 55 million people) do not have to retirement savings vehicles, with the goal of increasing 18 access to an employer-facilitated plan. the level of retirement savings and thus improve retirement – In the United States, employers are not currently security. required to offer a retirement savings plan. – Many medium-to-large businesses are closing their Some states are designing or implementing models occupational DB plans due to large deficits and high designed to provide workers in the private sector with running costs. Employers are switching to DC plans access to retirement plans (e.g. mandated payroll deduction where risk is shifted onto the individual and, typically, IRA programmes for employers who do not currently offer a employer contributions are lower. retirement savings plan). Others are using web portals, and – Research shows that small businesses are less likely at least one state is launching a Multiple Employer Plan (a to offer a retirement savings plan. The expense, single plan adopted by two or more unrelated employers). fiduciary liability and resource intensity of establishing and maintaining retirement plans are key factors in Challenges in the United States to expand access to smaller employers’ decisions to not offer retirement retirement systems plans. Individual states may face certain key challenges when passing and implementing retirement system reforms to expand access in the private sector: 18 How We Can Save (for) Our Future

Figure 10: State initiatives, 2018 Source: Georgetown University Center for Retirement Initiatives, “State Initiatives 2018: New Programs Begin Implementation While Others Consider Action” (https://cri.georgetown.edu/states/) Figure 11: Challenges to retirement system reform in the United States Source: Authors A. Access B. Participation C. Adequate D. Efficient Asset Savings Decumulation In the US, There is a lack of Problems exist with clarity on the ability of Only one-third of regard to fund leakage employers are not states to require auto- Americans have during the currently required to enrolment and to saved enough for accumulation phase offer make employer retirement.21 and how to optimally a retirement participation use funds during savings plan. mandatory. Improved low-cost retirement. and simple tools are Opportunities to needed to ensure a provide incentives to secure retirement employers and income. employees are scarce. E. Implementation There are issues regarding how to move accounts between employers and how to ensure that the different types of accounts can be combined safely and easily. How We Can Save (for) Our Future 19

What the United States can learn from other countries challenges for regulators regarding the scale of products to oversee. Challenges in disclosure arise when products The World Economic Forum worked with representatives are disparate, because of their complexity and legal from four national pension systems to capture some of the structure. This can lead to efforts to simplify messaging lessons from their experience: through straightforward disclosure mechanisms (e.g. product dashboards). Australia’s Superannuation System: – Market oversight: The Australian Prudential Regulation The Australian Superannuation System Authority’s role is to approve MySuper products, simple is renowned for successfully increasing and low-cost superannuation funds, against minimum coverage and levels of savings, but the criteria, but the criteria may not guarantee against system is dealing with certain major poor quality. This creates the risk that all products are challenges that provide interesting perceived as being of good quality and fit for purpose considerations for those designing new because they are authorized by the government, shifting systems. Employers are mandated to the burden of promoting quality to the government and contribute 9.5% (to be increased to away from the provider. 12% by 2025) and employees can make voluntary contributions in addition to Findings from Canada’s PRPP experience: those made by the employer. Individuals choose the plan provider. – Portability: The PRPP framework largely applies to all employees across seven of the 10 provinces and Canada’s Pooled Registered Pension the federal jurisdiction (which account for over 84% of Plans: Pooled Registered Pension Plans Canada’s population). Accounts are portable throughout (PRPPs), recently introduced to address those provinces and federal jurisdiction, and benefit from the workplace savings gap in Canada, economies of scale. aim to provide a simple, low-cost, large- – Implementation: This harmonized approach was scale portable system. The system is achieved through high political engagement at both the voluntary for employees, employers and provincial and federal levels, with representatives meeting the self-employed. Employers choose the every two weeks throughout the system design phase. plan provider. This collaboration helped all participating jurisdictions to agree to a common set of rules and a majority of uniform New Zealand’s KiwiSaver: KiwiSaver design features. was introduced 10 years ago to increase – Oversight: Plan supervision is executed at the federal occupational retirement savings levels. level, with the exception of one province, to reduce filing Employers and employees must each requirements. contribute at least 3% via auto-enrolment mechanisms with opt-out features. Findings from New Zealand’s KiwiSaver experience: Individuals choose the plan provider. – Market oversight: Providers must be accredited with The United Kingdom’s automatic the government, meeting particular rules prior to entering enrolment in workplace pensions: the market. A saver can only have one KiwiSaver The United Kingdom is five years into account but may transfer to another provider if wanted. a programme to roll out workplace Individuals who do not select one are enrolled into nine pensions throughout the private sector. default providers on a rotating carousel basis. Employers and employees must each – Implementation: The New Zealand tax office acts as the contribute 5% and 3%, respectively (by central administrator, collecting money through the PAYE 2019), using auto-enrolment mechanisms (Pay as You Earn) monthly return from employers and with opt-out features. Employers choose passing the money on to the relevant plan provider. the plan provider. – Incentives: Government incentives to encourage participation worked well; the government incentivized Findings from Australia’s Superannuation System: participation through a “kick-start” lump sum and a matching contribution to individuals in the form of a – Portability: There is no unique national ID number tax credit. Initially, the sum was NZ$1,000 on joining in Australia, which poses challenges for account a scheme, and an additional NZ$1,000 per year if the portability. Individuals can accumulate many different individual contribution reached at least NZ$1,000 in that savings pots throughout their careers as they change year. This incentive was decreased to NZ$500 per year employers. Retirement systems that allow portability and to individuals who paid in NZ$1,000, but the kick-start account consolidation significantly reduce the number was eventually abolished. In the first couple of years, of accounts as well as the administration burden on employers were also incentivized through an employers’ individuals, providers and regulators. tax credit, which offset the contributions they made for – Market size: The competitive market for providers is their employees. These incentives played an important large, offering 42,000 different investment options for a role in the programme’s success. working population of around 12 million. While it provides – Access and early savings: A unique feature of this individuals with extensive choice, this system has created system is that adults can open accounts for children. 20 How We Can Save (for) Our Future

This aspect has proved extremely popular. Approximately one-third of the population under the age of 18 has an account; the government’s NZ$1,000 kick-start contribution was also available to them. Findings from the UK’s automatic enrolment experience: – Participation: Participation rates are very high, largely driven by a combination of auto-enrolment (all staff must be enrolled in a plan and need to opt out if they do not wish to participate) and automatic re-enrolment every three years of workers who previously opted out. – Incentives: Both employers and the government contribute to individuals’ funds; individuals receive a 1% contribution from the government in the form of tax relief. – Market providers: The NEST (National Employee Savings Trust) was established with a Public Service Obligation; the trust is required to allow any employer to set up a plan. This requirement mitigates the risk of providers turning employers away, causing them to be non-compliant. – Market oversight: Non-compliant employers are fined a £400 fixed penalty, plus an additional £50 to £10,000 escalating fine per day, which is set depending on the size of the workforce. – Implementation: The regulator successfully engaged employers during the rollout phase, nudging them along gradually month after month and providing them with information at each stage. TV and radio campaigns proved most effective to raise the awareness of employers and employees. – Implementation and oversight: Payroll systems play a large role, through automation, in ensuring employers are compliant. Policy proposals at the federal level to expand access in the US private sector: – Expand access: Encourage retirement plans for more Americans, facilitated through the workplace – Design specific systems: Ensure legislation captures the overarching objectives but allows individual states the flexibility to design systems that meet their specific needs; clarify the legal status of requiring auto-enrolment through employers and provide flexibility under the Employee Retirement Income Security Act – Increase savings levels: Find ways for employers to contribute and increase annual IRA contribution limits – Increase participation: Encourage auto-enrolment and provide incentives for individuals and employers – Ensure portability: Make it easier for accounts to be portable across employers and states where possible – Maintain simplicity: Design low-cost plans with frictionless processes for employers and employees – Educate and reach out: Educate individuals about the programme to encourage participation and build confidence in the system; connect with and educate employers to ensure they are engaged in the programme, especially in the rollout phase How We Can Save (for) Our Future 21

Acknowledgements To focus on this critical and challenging topic, the World Michael O’Brien, Chief Executive Officer, EMEA, and Co- Economic Forum brought together multiple stakeholders, Head, Global Investment Solutions, J.P. Morgan Asset including national, state and local governments, regulators, Management, United Kingdom private and institutional investors, asset managers and insurance companies, drawing on solutions and experiences Robert Prince, Co-Chief Investment Officer, Bridgewater from various regions and countries, to implement the Associates, USA Retirement Investment Systems Reform project in Tharman Shanmugaratnam, Deputy Prime Minister and collaboration with Mercer. Coordinating Minister for Economic and Social Policies of Singapore The objective is to raise awareness of the implications of the market shift and look for opportunities to drive pension Theresa Whitmarsh, Executive Director, Washington State policy reforms. Best practices are also identified, and draft Investment Board, USA recommendations aim to ensure: 1) access by individuals to retirement solutions; 2) the sustainability of retirement Project Expert Committee systems; and 3) access by businesses and infrastructure to long-term capital. Leah Anderson, General Director, Financial Sector Policy Branch, Department of Finance of Canada, Canada The World Economic Forum would like to extend thanks to all those who support this project and the ongoing Angela M. Antonelli, Executive Director, Center for partnership. Retirement Initiatives, McCourt School of Public Policy, Georgetown University, USA Lead Author Gautam Bhardwaj, Co-Founder and Director, pinBox Stephanie Lane, Project Collaborator, Investors Industries, Solutions, Singapore World Economic Forum (on secondment from Mercer) Mel Charles, Head, Strategy, Design and Delivery, The World Economic Forum project team Pensions Regulator, United Kingdom Michael Drexler, Head of Financial and Infrastructure Mike Colby, Director, Client Services, Bridgewater Systems, Member of the Executive Committee Associates, USA Natalya Guseva, Community Lead, Institutional Investors Harry Conaway, President and Chief Executive Officer, Industry Employee Benefit Research Institute (EBRI), USA Adam Robbins, Practice Lead, Long-Term Investing Soon Khai Eng, Group Director, Policy, Central Provident Initiatives Fund Board of Singapore, Singapore Han Yik, Head of Institutional Investors Industry Casper van Ewijk, Chairman, Network for Studies on Pensions, Aging and Retirement (NETSPAR), Netherlands Project Steering Committee Matthew Eyton-Jones, Chief Executive Officer, CERN Jed Laskowitz, Co-Head, Global Investment Management Pension Fund, Switzerland Solutions, J.P. Morgan Asset Management, United Kingdom Elsa Fornero, Professor of Economics, University of Turin, Melissa Ma, Co-Founder and Managing Partner, Asia Italy Alternatives, Hong Kong SAR Tove Birgitte Foxman, Senior Consultant, PensionDanmark, Renée McGowan, Global Head of Individual Wealth, Denmark Mercer (MMC), USA Olga Fuentes, Deputy Chairman, Regulation, Torben Moger Pedersen, Chief Executive Officer, Superintendence of Pensions, Chile PensionDanmark, Denmark Robert Gardner, Chairman and Founder, Redington, United William Francis Morneau, Minister of Finance of Canada Kingdom Barbara Novick, Vice-Chairman, BlackRock, USA Teresa Ghilarducci, Bernard L. and Irene Schwartz Professor of Economics, The New School for Social Research, and 22 How We Can Save (for) Our Future

Director, Schwartz Center for Economic Policy, The New Joshua D. Rauh, Ormond Family Professor of Finance, School, USA Stanford Graduate School of Business, USA Joshua Gotbaum, Guest Scholar, Economic Studies Darren Ryder, Director, Automatic Enrolment, The Pensions Program, Brookings Institution, USA Regulator, United Kingdom Lynn Hemmings, Senior Chief, Pensions, Department of Sunghwan Shin, President, Korea Institute of Finance, Finance of Canada, Canada Republic of Korea Sadayuki Horie, Deputy Chairman, Investment Advisory Harry Smorenberg, Chief Executive Officer, Smorenberg Committee, Government Pension Investment Fund (GPIF), Corporate Consultancy, and Founder, World Pension Japan Summit, Netherlands Dirk Jargstorff, Senior Vice-President, Corporate Pension Fiona Stewart, Global Lead, Insurance and Pensions, World and Related Benefits, Robert Bosch, Germany Bank Institute, USA David C. John, Senior Strategic Policy Advisor, AARP Public Jack VanDerhei, Research Director, Employee Benefit Policy Institute, and Deputy Director, Retirement Security Research Institute (EBRI), USA Project, Brookings, AARP, USA Ian Veitch, Global Head, Corporate Life and Pensions Amy Kessler, Senior Vice-President and Head, Longevity Proposition, Zurich Insurance Group, Switzerland Risk Transfer, Prudential Financial, USA Bruce Wolfe, Executive Director, Retirement Institute, Stefan Kroepfl, Head, Life Planning and Development, BlackRock, USA Zurich Insurance Group, USA Alice Law, Chief Operating Officer and Executive Director, Hong Kong Mandatory Provident Fund Authority, Hong Kong SAR Ben Leonard, Managing Director, Insurance Coverage, HSBC, United Kingdom Anne Lester, Managing Director, Portfolio Manager and Head, Retirement Solutions, J.P. Morgan Asset Management, United Kingdom Annamaria Lusardi, Professor of Economics, and Academic Director, Global Financial Literacy Excellence Center (GFLEC), George Washington University, USA David Marchick, Managing Director, Carlyle Group, USA Carolyn Morris, Senior Policy Manager, Prudential Regulation, Australian Prudential Regulation Authority, Australia Arun Muralidhar, Chairman and Founder, Mcube Investment Technologies, USA Akiko Nomura, Managing Director, Nomura Institute of Capital Markets Research (NICMR), Japan Alwin Oerlemans, Chief Strategy Officer, APG Asset Management, Netherlands Gavin Perera-Betts, Executive Director, Product and Marketing, National Employment Savings Trust (NEST), United Kingdom Michael Preisel, Vice-President and Head, Quantitative Research, ATP, Denmark How We Can Save (for) Our Future 23

Endnotes 1. Mercer (2018), “Healthy, Wealthy and Work-wise – The New Imperatives for Financial Security”. 2. AARP Public Policy Institute (2014), “Workplace Retirement Plans Will Help Workers Build Economic Security”, Fact Sheet 317, available at https://www.aarp.org/content/dam/aarp/ppi/2014-10/aarp-workplace-retirement-plans-build- economic-security.pdf. 3. AARP (2006), Public Policy Institute Study, Unpublished estimates of the 2004 Survey of Income and Program Participation Wave 7 Topical Module. 4. Mercer (2018), “Healthy, Wealthy and Work-wise – The New Imperatives for Financial Security”. 5. Pew Charitable Trusts (2016), “Analysis of U.S. Census Survey of Income and Program Participation”. 6. Mercer (2017), “The Gender Pension Gap – From Awareness To Action”. 7. Mercer (2018), “Healthy, Wealthy and Work-wise – The New Imperatives for Financial Security”. 8. pinBox Solutions (2018), Saving the Next Billion from Old Age Poverty: Global lessons for local action, P. Seth Khanna, W. Price and G. Bhardwaj (eds), Narosa Publishing House Pvt. Ltd. 9. Employee Benefit Research Institute, Retirement Security Projection Model® versions 2554, 2558, 2564 and 2580. Results are based on “middle-income” 401(k) participants currently 25-29 years of age who are assumed to always work for an employer who sponsors a plan. For additional information, see Robin Green, Lori Lucas and Brett Hammond (2017), “Design Matters: The Influence of DC Plan Design on Retirement Outcomes”, DCIIA Retirement Research Board, available at https://bit.ly/2wSEExF. 10. Shlomo Benartzi (2011), “Saving for Tomorrow, Tomorrow”. 11. For additional information on the assumptions used in this model (including a sensitivity analysis on rates of return), see Jack VanDerhei (2014), “Why Does Retirement Readiness Vary: Results from EBRI’s Retirement Security Projection Model®”, The Journal of Retirement, 1(4), 95-117, available at http://bit.ly/jor-2014-spring2. 12. Board of Governors of the Federal Reserve System (2016), Report on the Economic Well-Being of U.S. Households in 2015, available at https://www.federalreserve.gov/2015-report-economic-well-being-us-households-201605.pdf. 13. Financial Industry Regulatory Authority (FINRA) Investor Education Foundation (2015), “2015 National Financial Capability Study”, available at https://www.usfinancialcapability.org/downloads/NFCS_2015_State_by_State_Meth. pdf. 14. Dilip Soman and Amar Cheema (2011), “Earmarking and Partitioning: Increasing Saving by Low-Income Households”, Journal of Marketing Research, 48, S14-S22, available at http://www-2.rotman.utoronto.ca/facbios/file/earmarking- jmrPP.pdf. 15. World Economic Forum (2017), “We’ll Live to 100 – How Can We Afford It?”. 16. World Economic Forum (2017), “We’ll Live to 100 – How Can We Afford It?”. 17. Board of Governors of the Federal Reserve System (2016), Report on the Economic Well-Being of U.S. Households in 2015. 18. AARP Public Policy Institute (2014), “Workplace Retirement Plans Will Help Workers Build Economic Security”, Fact Sheet 317. 19. Irena Dushi, Howard Iams and Jules Lichtenstein (2015), “Retirement Plan Coverage by Firm Size: An Update”, Social Security Bulletin, 75(2), 41-55, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2604116. 20. John Beshears, James J. Choi, J. Mark Iwry, David C. John, David Laibson and Brigitte C. Madrian (2017), “Building Emergency Savings Through Employer-Sponsored Rainy Day Savings Accounts”, Working Paper. 21. National Institute on Retirement Security (2015), The Continuing Retirement Savings Crisis. 24 How We Can Save (for) Our Future

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