Overseas Pension Fixes Could Carry Policy Tradeoffs

August 24, 2009 (PLANSPONSOR.com) - Private pension systems in other countries may offer an illuminating glimpse into potential plan design and operations that could help current problems afflicting the U.S. retirement savings program.

For example, a new Government Accountability Office (GAO) report said, based on current practices in the three countries the GAO studied, researchers said the U.S. could better distribute investment risk among pools of workers, employers and retirees, which it said could reduce volatility.

The three nations’ systems also offer ideas for mitigating risks in accumulating and preserving benefits, such as mandating coverage, restricting leakage from plan loans and pre-retirement distributions and a more widespread system for using annuities to draw down benefits. The GAO was also looking for potential solutions for inadequate worker savings rates, imprudent worker investment choices, and the effects of plan fees on worker retirement – three other issues bedeviling the U.S.

The GAO said it picked the three countries after deciding they offered potential solutions to pension problems currently afflicting the U.S.

“Despite important social, economic, and institutional differences between the United States and these countries, key features from these models, as well as the domestic proposals, are relevant and could potentially offer some solutions for the U.S. pension system,” the GAO researchers wrote. “Taken together, these key features could be used to more comprehensively address risks workers face. The challenge for Congress will be to balance the interests and responsibilities of workers, employers, and the government and find the most promising steps to help Americans achieve retirement security.”

The look at pension practices in the three countries was contained in a GAO report issued Monday entitled “Private Pensions: Alternative Approaches Could Address Retirement Risks Faced by Workers but Pose Tradeoffs.”

The GAO report warned that adopting pension provisions from the countries such as Netherlands, Switzerland, and the United Kingdom could bring potentially negative tradeoffs for U.S. systems.

"However, " the GAO pointed out, "the new approaches raise a number of issues that would have to be addressed, including the relative roles of workers, employers, and the government, particularly with regard to contributions, how such a system would be administered, and its relationship to both Social Security and the existing private pension system."

The possibility of carrying over coverage mandates to the U.S. could also produce difficulties for employers if the costs of maintaining a pension plan become prohibitive, the GAO said.

As an example of the tradeoffs that could be encountered in porting solutions from other countries into the American system, GAO researchers cited the fact that the pension systems in the Netherlands and Switzerland address investment risks faced by workers in various ways, such as pooling assets and guaranteeing rates of return and that in the Netherlands and Switzerland, most private pension fund assets are pooled and managed by a pension fund board comprised of employer and worker representatives.

According to the GAO, the arrangement was built on the notion that the "social partners" - employers and employees - would share the risks involved. "Officials from the Netherlands and Switzerland said that the social partnership between employers and workers was a key feature of their systems, and officials from the Netherlands said that there has been a slower shift from DB plans to self-directed DC plans than in other countries because of this partnership," the report said.

The report is available here .