The disturbing look at the ailing worldwide retirement plan space – severely damaged by weak markets and stagnant economies – comes from the latest Cerulli Edge report from Cerulli Associates. “Occupational and individual pension savings schemes – plans that traditionally have formed the bedrock of asset management industries worldwide – have been crushed by three years of negative markets returns,” Cerulli researchers wrote.
With corporate pension plans in the largest DB markets – the US, the UK, Japan, and the Netherlands – underfunded by at least $800 billion, the Cerulli researchers said corporate sponsors needed to pump $120 billion into their plans immediately, “plus substantial sums going forward to bring pension funds back to full funding levels.”
Cerulli noted that the rampant problems in the retirement plan system have at least partly cooled calls for privatizing pensions through investment of Social Security funds into the markets and that many governments are increasingly eyeing benefits cuts “as an increasingly viable alternative to deficit spending on retirement provision.”
Cerulli’s survey of pension problems around the globe included observations that:
- Swiss government officials are expected to release a pension reform plan soon, as well as a study of the risks of the current pension funding system. The officials are also expected to review the pension return guaranteed by law – recently cut from 4% to 3.25%. Swiss plan sponsors have also been more willing to commit resources to alternative investments – at least 5% in private equity and hedge funds for the Swiss versus between 1% and 2% for the average European plans.
- A significant issue in the German retirement plan market is the Riester Pension, which went into effect in January 2002 and supplements statutory pension plans. It is subsidized by the state. The German government established a study commission in November 2002 to look into pension financing issues.
- DC plans are becoming increasingly popular in Japan “as Japan’s corporate pension crisis continues.” According to a recent survey quoted by the Cerulli researchers, 361 DC plans got government approval by the end of March 2003 – a 30% increase from the month before. One reason for the increase are plans allowing small-and mid-sized companies to become part of a common plan structure with a predetermined fund menu – a comparatively cheap alternative.