The defined contribution (DC) pension markets in Australia, the UK and the US are the largest globally, according to research by Schroders.
Its Lessons learnt in DC from around the world report investigated the universal commonalities and local distinctions in DC systems, and highlights the key concepts that determine success and failure.
The research found that, in the US, DC pensions have overtaken defined benefit (DB) pensions both in terms of total assets and growth rates.
DC assets also represent a larger proportion of gross domestic product (GDP) than DB pensions in countries such as Chile, Denmark and Iceland.
The research put forward three recurring global themes:
- DC schemes need to be compulsory.
- DC schemes need a minimum 15% contribution.
- DC schemes need to follow a real return strategy.
Lesley-Ann Morgan, head of global strategic solutions at Schroders, said: “The single biggest factor in determining the success of a DC plan is having sufficient contributions. We believe that this is best obtained by compulsion to overcome the issue of inertia, and we support the concept of auto-enrolment fully.
“In Singapore, Hong Kong, Australia, New Zealand, Sweden, and now the UK, employees are compelled to contribute to a state or workplace DC plan. However, we believe that contributions in the majority of these countries are still too low given long-term future return expectations.
“In Australia, where the rate is due to increase progressively to 12% per annum by July 2019, a report by CPA Australia, the nation’s largest accounting body, warns that even this may not be high enough for Australians to retire at the current retirement age.
“Our research shows that contributions of at least 15% of salary and real investment returns of 3% per annum are the minimum to produce an adequate standard of living in retirement. We looked across the world and if you want a two-thirds of salary pension, you need to contribute 15% for 40 years.”