1. Mercer Human Resource Consulting Limited is authorised and regulated by the Financial Services Authority Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU Deborah Cooper London, UK The payout phase of funded pensions Workshop on private pension provision – decumulation phase 7 September 2007

2. Mercer Human Resource Consulting 2 The payout phase of funded pensions Agenda Context Terms of reference What is being investigated What we know already

3. Mercer Human Resource Consulting 3 The payout phase of funded pensions Agenda Context Terms of reference What is being investigated What we know already

4. Mercer Human Resource Consulting 4 The payout phase of funded pensions Objectives of pension saving Sustainability Adequacy Modernisation

5. Mercer Human Resource Consulting 5 The payout phase of funded pensions Pensions vs poverty Poverty threshold Pillar 1Comment Cz4660960minimum pension De989014110average pension, full service Ee28702260average pension, full service Es70406540minimum pension Ie900010040maximum flat rate Pl28801850minimum pension Sl70508810average pension, full service Nl969011950 UK106506540minimum, flat rate pension

6. Mercer Human Resource Consulting 6 The payout phase of funded pensions Possible objectives of pension saving 1 st pillar2 nd and 3 rd pillars Help redistribute between income groups and cohorts Provide insurance in old age Provide minimum income above a certain age Provide ‘adequate’ income above a certain age Reduce reliance on state Assist individuals to distribute employment income over their adult lifetime Contribute towards adequate incomes in retirement Help maintain standard of living throughout lifetime

7. Mercer Human Resource Consulting 7 The payout phase of funded pensions Pension environment Defined benefit provision replaced with defined contribution Government provision replaced with employer provision Employer provision replaced with private saving – People living longer – Working lifetimes getting proportionately shorter – Measurements of adequacy - replacement ratios

8. Mercer Human Resource Consulting 8 The payout phase of funded pensions Agenda Context Terms of reference What is being investigated What we know already

9. Mercer Human Resource Consulting 9 The payout phase of funded pensions Aims of investigation To determine how sucessfully payout phase helps savers to achieve these aims To consider whether there are obstacles To consider whether markets or regulators could make it easier to achieve these aims – Security vs. flexibility Making use of international comparisons

10. Mercer Human Resource Consulting 10 The payout phase of funded pensions Need for regulation – does one size fit all? state private

11. Mercer Human Resource Consulting 11 The payout phase of funded pensions Agenda Context Terms of reference What is being investigated What we know already

12. Mercer Human Resource Consulting 12 The payout phase of funded pensions What is being investigated Step 1: Create an inventory of Member states pension markets including: ¯ Requirement for annuities ¯ Options for lump sums, drawdown, other forms of payment ¯ Indexation requirements ¯ Interaction between tax and social security regimes Commentary on types of annuities, single, joint-life,

13. Mercer Human Resource Consulting 13 The payout phase of funded pensions What is being investigated Step 2: Review of recent and anticipated market developments Commentary on annuity form flexibility and pricing structures. Analysis of risk management options Analysis of information and advice available for provider choice. Consideration of cross-border provision of annuity Hurdles to greater availability and product development. Commentary on other retirement saving vehicles, or other forms of saving products

14. Mercer Human Resource Consulting 14 The payout phase of funded pensions Agenda Context Terms of reference What is being investigated What we know already

15. Mercer Human Resource Consulting 15 The payout phase of funded pensions Behavioural economics Individual savers on average are: – relatively unsophisticated – have low levels of saving People tend to be ‘optimistic’ when making savings decisions. They: – do not understand investments or investment risk – ignore inflation – underestimate their longevity

16. Mercer Human Resource Consulting 16 The payout phase of funded pensions Work and Savings Survey – UK employees 85% of employees think planning for retirement is important – Only half feel confident they are doing enough to prepare – Over a quarter worry that they do not know what to do Only 20% of employees understand what an annuity is 52% of people believe they will receive a pension income (excluding state pension) in excess of 50% their salary – Average contributions to UK occupational DC schemes are 9% – 2/3rds expect to retire at or before age 60

17. Mercer Human Resource Consulting 17 The payout phase of funded pensions WorkPlace Survey – US employees For 85% of employees, retirement is the most important reason for saving – For 24% of employees, not saving enough for retirement is their biggest financial worry 65% think they are not saving enough for retirement – 53% worry that in retirement they will not be able to afford health care

18. Mercer Human Resource Consulting 18 The payout phase of funded pensions What we know already about provision - 1 Lifetime annuities most common – 1 st pillar in annuity form, sometimes with partial lump sum option – 2 nd, 3 rd pillars more varied Availability of lump sum tends to be – Related to size of first pillar  Countries with large 1 st pillar more likely to permit lump sum – Related to size of second pillar  Countries with little 2 nd and 3 rd pillar provision more likely to permit it to be taken as lump sum – Related to size of fund  Annuity requirement relaxed for small funds

19. Mercer Human Resource Consulting 19 The payout phase of funded pensions What we know already about provision - 2 Sometimes: – Annuity indexed to prices – Joint life annuities compulsory – Some of risks borne by individuals are shared  E.g. system takes some investment/inflation/longevity risk

20. Mercer Human Resource Consulting 20 The payout phase of funded pensions International experience – three different regimes USAFranceUK Retirement age 6560-6565 Payment form Lump sumAnnuity with guarantee Annuity Participation rates 55-64 62.9%43.6%58.4% Replacement ratios (gross) 41.2%51.2%30.8%

21. Questions ? What is the purpose of 2 nd and 3 rd pillar retirement saving? How permissive to you believe retirement regimes can be? Should social security systems protect themselves from excessive drawdown? Do annuity streams meet the consumption needs of people in retirement?

22. Mercer Human Resource Consulting 22 The payout phase of funded pensions Sources OECD Employment Outlook, OECD 2006, http://www.oecd.org/dataoecd/53/15/36900060.pdfhttp://www.oecd.org/dataoecd/53/15/36900060.pdf Selection of pensions at a glance indicators – how does your country compare?, http://www.oecd.org/dataoecd/13/61/38710921.xls http://www.oecd.org/dataoecd/13/61/38710921.xls Benefit plans throughout the world, Mercer Work and Savings Survey, Mercer UK WorkPlace Survey, Mercer US Joint report on social protection and social inclusion, Brussels 6.3.2007, SEC(2007) 329 Central and European Pensions 2007, Allianz Global Investors Preliminary responses to Payout phase survey questionnaire, Mercer