From Resource, October 2006
Copyright by LOMA

Leaving the Nest: World Pension Reform

Dozens of countries are nudging their citizens toward self  sufficiency in retirement. Here’s a look at who’s doing what.

By Jennifer C. Rankin

Countries around the world are taking a hard look at the viability of their government, occupational and individual pension programs. The demographic and fiscal drivers are universal. Dropping birth rates and increasing life expectancy has resulted in rapidly aging societies, which leaves fewer workers for each retired person and places tremendous pressure on a country’s social security infrastructure and financial bottom line. So does the fact that corporations around the world are deliberately underfunding traditional defined benefit pension plans and jettisoning fully-funded plans.

   These are vital issues. Hardly a day goes by without a media report on the so-called pension crisis and its ramifications for impending retirees and future generations. And the past decade has brought broad recognition of the importance of pension systems to the economic stability of nations, both developed and emerging, and the well-being of their citizens.

   Even though the pension crisis is global in nature, reform is largely a national matter. That’s because sustainable solutions must be crafted in the context of local politics, budgets, constituents, laws, regulations, and social contracts. This makes it very difficult for a country to accomplish reform—let alone adopt another country’s solutions.

   Be that as it may, we have much to learn from one another on the road to reform. The Chilean model, for instance, has gained much traction in emerging economies around the world, most recently in Central and Eastern Europe . In fact, José Piñera, one the original architects of pension reform in Chile , is in much demand as a consultant. Russia is the latest government to seek his advice.

   We all can draw inspiration from the accomplishments of other countries. Fortunately, there are many, many examples of pension reform from which to choose. Since the early ‘90s, the World Bank has been involved in pension reform in more than 80 countries and says the demand for reform support continues to grow.

   During the past 15 years, three regions have led the way with respect to pension reform—Latin America , Central Europe and Eastern Europe . While the transition economies of Europe were influenced by the early experience in Latin America , reform developed quite differently in the two regions.

   It seems impossible that a quarter of a century has passed since Chile jump-started the global pension reform movement. The Chilean Social Security system consists of the world’s first funded, defined contribution individual accounts—which are managed by private pension fund administration firms known as AFPs—plus a social safety net supplement.

   Since then, 12 Latin American countries have passed reform legislation and implementation is underway in 10 of them, according to the World Bank. Each of these countries has introduced a mandatory funded pillar.

   The extent of the mandatory pillar relative to the pay-as-you-go system—and many other features—differ from country to country.

   In addition, all countries—except Mexico and Colombia —unified previously fragmented pension systems into a single system that covers the entire formal labor market. This unification of the civil servant and national systems is a significant achievement.

   These 12 countries represent nearly half the population of Latin America .

   Ten Central and Eastern European countries have introduced multi-pillar pension systems. The reforms shifted a portion of the mandatory pension contributions to private institutions that have established individual defined contribution accounts for each eligible worker. Some of these countries reformed the public pillar through the introduction of individual and nonfinancial defined contribution accounts.

   Actual and comprehensive reforms are still limited in the Asia Pacific, Middle East and Africa . However, many Asia Pacific countries are in the midst of serious policy discussions about the need for reform and the direction reform should take. China , in particular, is re-tooling its insurance and financial services infrastructure to position itself for change. India has almost passed reform legislation a number of times. And comprehensive reform has been an elusive goal in the United States of America and in Western Europe—with the exception of Switzerland , the Netherlands and the United Kingdom , which, along with Chile , were the first countries to reform in the 1980s.

   Canada , which has one of the most generous pension systems in the world, underwent a series of reforms between 1996 and 1997. The government took a parametric, rather than a structural, approach to reform. In other words, it tweaked existing social security parameters rather than overhauling or replacing the system.

   Canadian reforms had several drivers. In Canada , the 55+ crowd is the fastest growing segment of the workforce, according to Don Bisch of Benefits Canada, who spoke at the 2006 LOMA Canada Annual Conference in June. Underfunding of employer-sponsored plans is a problem. Seventy-two percent of federally regulated pension plans were underfunded at June 30, 2005, up from 53 percent at the end of 2004, according to the Office of the Superintendent of Financial Institutions. Benefits inadequacy is another issue. Thirty percent of large employers surveyed recently have, are in the process of, or are planning to wind up their defined benefit plans and moving to Capital Accumulation Plans—that is, defined contribution pension plans. Rapidly rising health care costs are another concern.

   The Canadian system is a three-tier, government sponsored system:  

* The first tier is the Old Age Security scheme, which was legislated in 1927. Under OAS, all Canadian citizens and legal residents with 40 years of residence after age 18 are eligible for a full pension, with benefits starting at age 65.

* The second tier is the Guaranteed Income Supplement. The GIS was introduced in 1966 along with the Canada/Quebec Pension Plan. Because the C/QPP called for a 10-year transition period before retirees could collect a full benefit, the government added the GIS to the OAS to temporarily cover the transition. This “temporary” measure remains an essential part of the pension system. Payments are made out of tax revenues, and no contributions are required. Benefits are nontaxable. Nearly 80 percent of all single GIS recipients are women.

* The third tier is the C/QPP, with full benefits first paid in 1976.

   The parametric changes to Canada ’s social security system are too numerous and technical for the layman to describe. Generally speaking, however, the reforms decreased benefits by about nine percent, boosted funding, and raised the rate of return earned on reserved fund assets. Analysts expect the Canadian pension system to be solvent for the foreseeable future.

   Another bright spot in Canada is product innovation. Under study at the moment are member-funded pension plans (MFPPs), under which employer contributions would be fixed and members would be responsible for making up funding shortfalls as well as entitled to any surplus. According to Bisch, such a product would make it easier and less costly for employers to establish pension plans.

   Another success story is Mexico .

   The Zedillo administration (1994-2000) overhauled the Mexican pension system, which the Fox government (2000-2006) then changed further. According to an analysis by the Economist Intelligence Unit, the reform of Mexico ’s pay-as-you-go state pension system was formally initiated in December 1995 with the passage of a Social Security Act (Ley del Instituto Mexicano del Seguro Social). It continued with the passage of the Retirement Saving Systems Act (Ley de los Sistemas de Ahorro para el Retiro) in May 1996 and the publication of a corresponding regulatory law in October 1996. Government workers remain members of a separate public-sector plan.

   Mexico created an entirely new type of financial entity—the retirement fund administrator (administradora de fondos para el retiro, or afore)—to replace the former state pension system. Afores manage workers’ money through specialized retirement mutual funds (sociedades de inversion especializadas de fondos para el retiro, or siefores). The system took effect in July 1997 and began to receive workers’ savings in September 1997.

   “Afores, unlike their U.S. pension fund counterparts, do not operate with employers as intermediaries, but rather communicate directly … with their members in the workforce.”

   Many afores are joint ventures between Mexican partners and foreign financial institutions. In fact, a look at the top 10 pension fund managers in the country—Banamex (Citigroup, U.S.), BBVA Bancomer (Spain), Inbursa, Profuturo GNP, ING (Netherlands), Santander Serfin (Spain), Banorte Generali (Italy), Afore XXI (Prudential, U.S.), Principal (U.S.), and HSBC Afore (U.K.)—reads like a who’s who of leading global players.

   The National Commission for the Retirement Savings System (Comision Nacional del Sistema de Ahorro para el Retire, or Consar), an agency of the Ministry of Finance and Public Credit, regulates and oversees the system.

   Economist Intelligence Unit analysts say the system works well. Since the reforms:

  * Private pension funds “are now flush with liquidity, thanks to Mexico ’s young population—the average age is 27—that has yet to begin tapping their deposits.”

* The number of workers linked to afores continues to increase.

* Funds’ total assets under management are growing and “they generated real net yields of 7.33 percent in 2005.”

* The rapid consolidation  of Mexico ’s banking industry has led to mergers among fund managers. “In 2005, the five biggest afores—Banamex, with 19.86 percent market share, Bancomer (18.99 percent), Inbursa (10.4 percent), Profuturo GNP (10.04 percent) and ING (8.22 percent)—handled nearly 70 percent of workers’ funds.”

   The Mexican pension system is a work in progress. The country is slowly loosening restrictions governing asset management market share, funds, investment choices, and more. It also passed legislation in October 2002 that permits siefores to take contributions from and provide benefits to independent workers.

   Brazil , to which many of the world’s leading financial players are flocking, faces a unique set of circumstances—circumstances that sets the country apart both inside and outside Latin America . A delegate from Salesian University discussed those differences at the March 2006 conference Lessons from Pension Reform in the Americas , which was sponsored by the Federal Reserve Bank of Atlanta , the Pension Research Council at The Wharton School, and the Instituto Tecnologico Autonomo de Mexico and held in Atlanta .

* First, Brazil ’s pension system was written into its 1988 constitution, which means that revisions involve passing a constitutional amendment that requires a 3/5 majority in the Chamber of Deputies.

* Second, it is the largest anti-poverty program in the country.

* Third, Brazil already had a large private pension fund sector before reform, so efforts to restructure the system post-1988 have been parametric, focusing on improving the efficiency and equity of the state-run public systems.

   The Cardoso administration enacted reforms in 1998. Some considered Cardoso’s reforms insufficient and, in April 2003, the Lula administration began a new reform effort. Most recently, reforms have called for defined contributions without the funded accounts seen in the rest of Latin America .

Common Challenges

The more one studies global pension reform, the more one realizes all countries face a set of common challenges. Regardless of its place on the pension reform spectrum—from early adaptor to late bloomer—every country is working hard to secure consumer buy-in, overcome national politics, honor its social contracts, and embrace private-sector product innovation

   Let’s take a closer look at consumer buy-in.

   Every year, Principal Financial, a leading American life insurer with a growing global presence, asks consumers in 12 countries—India, Japan, Hong Kong, China, Brazil, Chile, Mexico, Great Britain, France, Germany, Italy and the United States—about their prospects for a financially secure retirement. The results are sobering (see Confidence Problem).

   Large proportions of workers in the 12 countries surveyed view their retirement with trepidation. Many in every country have some doubt about even their ability to afford basic expenses once they retire. Despite a great deal of diversity in the retirement systems of these countries, they share several common problems.

   In every country surveyed, there is a troubling lack of financial preparation for retirement. Although at least one-fourth of workers in every country believe that they are behind schedule in planning and saving for retirement, only small minorities have attempted the basic step of determining how much they need to save to achieve a comfortable lifestyle in retirement. Even more worrisome is that survey participants do not seem to recognize how financially ill-prepared they are for retirement.

   Workers also believe their employers and governments are not serving them well in their efforts to attain financial security in retirement. A majority in every country are not convinced they will receive the benefits they are entitled to from their employers’ retirement or pension funds. Only small minorities—regardless of the type of retirement system—believe they can trust the government to help them save for retirement or maintain their standard of living once they reach retirement.

   This has profound implications for everyone with a stake in social security and pension reform—governments and policymakers, employers and employees, and insurance and financial services companies.

   First, consumer financial literacy has begun to take center stage. The private sector can play a pivotal role in consumer education and the U.S. has really taken the lead here.

   Some of its most prestigious companies—including Wachovia Bank, Visa USA, Nationwide Financial, New York Life, and Genworth Financial—have reached out to the consumer with highly sophisticated and comprehensive financial education Web sites, community programs and more.

   The U.S. government is involved in the financial literacy movement, as well. In addition to being the subject of extensive Congressional testimony, the topic has been addressed in both state and federal legislation, including the:

* Savings are Vital to Everyone’s Retirement (SAVER) Act of 1997, which mandated a series of national summits on financial literacy.

* No Child Left Behind Act of 2001, which formally recognized the importance of financial education in schools.

* Financial Literacy and Education Improvement Act of 2003, which created a Financial Literacy and Education Commission that’s responsible for developing a national strategy to promote financial literacy among consumers.

   Legislation, however, is just the tip of the iceberg. Countless state and federal entities—from the Securities and Exchange Commission to the Governor’s office—are engaged in a broad spectrum of financial literacy initiatives (see Money Matters, Resource, July 2005).

   International engagement also can allay consumer mistrust. Many countries with developing economies, such as China , are implementing the checks and balances found in more mature financial markets and are allowing their financial services providers to forge strategic alliances with foreign companies in order to leverage their knowledge and experience.

   While China ’s pension system has undergone quite a few changes since its inception in the 1950s. It has moved from a largely unfunded pay-as-you-go system to a partly funded multi-pillar system that includes individual accounts.

   China ’s first formal pension system, established in 1951, had defined benefits at 50 to 70 percent of workers’ wages. Contributions from companies, which were state-owned enterprises, were the only funding source. A national pool for pre-funding purposes was also set up. However, this practice of social pooling was eliminated during the Cultural Revolution of 1966 to 1976 and, as a result, pension payments had to be met solely by the current revenues of the SOEs.

   Economic reforms starting in 1978 introduced additional and higher benefits as well as incentives for early retirement.

   Further reforms in the 1990s created a multi-pillar pension system. Social pooling was re-introduced and individual accounts were set up. The pillars of this system, which is in place today, are:

* A basic pension plan or defined pay-as-you-go pillar to provide retirees with a minimum level of benefits. This pillar is financed entirely by enterprise contributions.

* A mandatory defined-contribution pillar for accumulating additional benefits by contributions via individual accounts, jointly financed through individual contributions and enterprise contributions.

* A voluntary supplementary pension pillar managed by individual firms or private insurance companies.

   Although significant reform has occurred, China ’s pension system is saddled with a variety of problems. First, it is burdened by a large amount of legacy debt—that is, unfunded liabilities from the old pension system. Second, decentralization has led to fragmentation and intransparency. Finally, immature capital markets make it difficult to find suitable investments with high returns.

   Despite these barriers, China has made astonishing progress in laying a financial infrastructure to support true pension reform in the future. During the past two years, the country has made great progress on its WTO commitments, crafting new rules that:

* Reduce paid-in capital and double the stake that local and foreign investors may purchase in Chinese insurers to 20 percent

* Allow foreign companies to expand beyond the 15 mainland cities to which they once were restricted

* Allow the 30-plus foreign life insurance companies and their joint venture partners to sell group insurance

* Allow the formation of insurance asset management companies

* Allow local and joint venture insurance companies to invest assets directly into Chinese shares and bonds.

   Insurers and banks have moved quickly to capitalize on these new rules by acquiring large stakes in local-national companies; establishing new branch offices; entering the newly-opened group life, health and pensions markets; and establishing asset management operations.

   At the moment, all eyes are watching China ’s nascent fund management sector. Beijing has begun to relax the regulations governing its six-year-old, US$ 40 billion mutual fund industry. And savvy players are positioning themselves for the full opening of the country’s banking sector, which will occur by year end as part of China ’s WTO commitments.

   Like China , Russia wants a place at the global table. And, like China , it has made significant strides toward that goal and faces daunting challenges.

   In a particularly thorough and insightful analysis of Russia’s attempts to reform its pension programs, analyst Leon Aron of the American Enterprise Institute notes, “Perhaps more than any other structural market reform unfolding today in Russia, pension privatization epitomizes both the enormous progress achieved over the past decade and to equally huge obstacles still ahead on the road to ‘civilized’ liberal capitalism. The reform highlights and tests the quality of key institutions and instruments central to such a system: transparency and liquidity of banks and mutual funds, probity and competence of state regulatory agencies, and stability of equity and bond markets.”

   The PAYG system inherited from the Soviet Union required all employers to pay a 28-percent payroll tax on each worker’s wages in order to fund the pensions of current retirees. Private pension plans have existed in Russia since 1992, with virtually every major company instituting one for its workers. In July 2003, the top 20 private pension funds held rubles 48.6 billion (US$ 1.6 billion).

   President Boris Yeltsin first outlined the concept of replacing the distributive pension with one of private savings and investments in his Spring 1997 state-of-Russia address to the Federal Assembly, according to Aron, but the fierce opposition of the leftist plurality in the Duma and the subsequent 1998 financial crisis derailed discussions.

   President Vladimir Putin put the issue back on the table during his first term in office (2000 to 2004). In late 2000, his administration outlined a reform plan and, in February 2001, in nationally televised comments, he declared that “the current pension system has outlived itself.” Four months later, the Duma approved the first three reform bills amidst a walkout by the Communist deputies and a protest demonstration by leftists outside the parliament building.

   “Because of the extremely sensitive politics of the reform,” writes Aron, “it was not until the Summer of 2002 that the Duma passed the long and detailed federal law on a new pension system and not until the Fall of 2003 that implementation mechanisms and instruments were finally approved.”

   The legislation separates the mandatory 28-percent pension withholding into three segments:

* Bazovaya (basic). Fourteen percent of the mandatory withholding will be used—as before—to pay current retirees and, when the time comes, to provide a uniform, minimal entitlement to future retirees.

* Strakhovaya (insured). Depending on the employee’s age, between eight and 14 percent of the mandatory withholding will be placed in individual accounts. Employees receive annual statements that allow them to monitor employer contributions.

* Nakopitel’naya (accumulating). The remainder becomes the property of the employee, who decides how to invest it. To minimize the risks of short-term investments, this option is available only to those who in 2002 were at least 10 years from retirement. Those entitled to accumulation may choose to remain in the state system, in which case the Pension Fund of Russia (PFR) will transfer their money for investment to the state-owned Vnesheconombank (VEB), which is the sole state managing company. Or, they may opt out for private asset management by one of 55 non-state managing companies. Employees may leave VEB for a private money manager or change their private manager once a year. Investment options are restricted and closely monitored in both state and non-state managing companies.

   Russians are responding to the new system with caution—in fact, less than five percent of the 37 million eligible workers have signed on with private management companies. Nevertheless, reformers are determined to provide profitable options for employees and hopeful that as Russia ’s financial infrastructure becomes more dependable and less volatile, foreign conglomerates will invest in asset management operations and employees will be more willing to invest their savings.

Political Skirmishes

In addition to engaging the consumer, reform proponents are coping with some pretty serious partisan politics.

   In the typical scenario, everyone—citizens, corporations, unions, governmental bodies—agrees there’s a problem. But as proposed solutions wend their way through the legislative process, skirmishes among political parties block national reform.

   India serves as an excellent example of the political hurdles pension reform proponents face. Since early 2000, various reform proposals have been introduced, only to meet fierce resistance when it appears true reform may pass. Reform proponents want to replace the existing non-contributory, unfunded, defined benefit scheme with a fully-funded, defined contribution scheme.

   On the table at the moment is a draft of the 2005 Pension Funds Regulatory & Development Authority (PFRDA) Bill. Its fate is uncertain, notwithstanding the government’s assertion that it is going ahead with pension reforms.

   The PFRDA Bill faces significant opposition from India ’s Left parties, which are chiefly opposed to two of the bill’s proposals—privatizing pension funds and investing the funds in the equity market.

   While this particular bill is in limbo, India is making progress.

   On January 1, 2004, the country’s New Pension Scheme—or NPS—took effect for all new employees of the federal government. Under the NPS, said employees must contribute 10 percent of their salary to a defined contribution scheme. The government—as employer—matches the 10 percent contribution. Each employee has an individual account, which is portable. No withdrawals are allowed until age 60, at which time the accumulated savings will be divided between a compulsory annuity and a lump-sum cash-out. At the present time, employees covered by the old defined benefit scheme are not allowed to switch to the new plan, although the idea is under discussion.

   While the NPS is mandatory for central government employees, it has potential for a much wider reach. Sixteen states have decided to introduce similar schemes for state government employees, according to Far Eastern Economic Review analyst Mukul Asher.

   The Pension Funds Regulatory & Development Authority will regulate the NPS should the stalled 2005 PFRDA Bill become law. In the meantime, a couple of existing regulatory bodies supervise the NPS.

   The Indian government also is poised to implement the exempt-exempt-tax (EET) system of taxation for pension savings, according to Asher. Under the EET system, contributions and investment income are exempt from income tax, but withdrawals in the payout phase are taxed. In other words, India is aligning its pension tax system with international practices.

   Another late bloomer is the U.S. The hard fact of the matter is that privately managed and funded plans are already a component of the public social security systems of some 30 nations around the world. Meaningful debate about social security reform in the U.S. , however, is a relatively recent event.

   The U.S. may be operating on a slower timetable than the rest of the world, but it’s near the top of the list when it comes to political infighting. The Republican and Democratic parties are at complete odds. At the risk of oversimplifying a very complex debate, it’s fair to say that Republicans generally favor shifting the burden of retirement income to the individual, while the Democrats believe the government should bear some responsibility for the well-being of its citizens in old age.

   It’s impossible to discuss global pension trends without mentioning the U.S. , for a couple of reasons. First, the country is a retirement product innovator to which countries around the world are looking for ideas. Second, American Boomers will hold 20 percent of the world’s wealth during their retirement, according to Swiss bank UBS, and the world’s multinational financial conglomerates want their business.

   The U.S. has a multi-tier scheme for retirement income—an approach known as the “three legged stool.” The first leg is the Social Security program, to which both employers and employees contribute. Occupational pensions comprise the second leg, under which employers offer their employees a defined benefit pension plan, a defined contribution pension plan, or both. The third leg is personal savings in the form of interest-bearing accounts, securities, IRAs, annuities and so on.

   Retirement plans are defined in tax terms by the IRS code. Significant, varied and complex tax implications underpin all three legs of the stool.

   Most retirement plans also are regulated by the Department of Labor’s ERISA provisions. There are a wide variety of plans available and a very large amount of tax laws and regulations affecting them.

   The U.S. system is under a great deal of pressure:

* The Social Security trust fund is not only under-funded, but also has been raided repeatedly to shore up the national budget and to fund an array of government programs.

* In the private sector, an uncomfortably high number of corporations have under-funded their defined benefit pension plans, which, as they collapse, fall under the purview of the Pension Benefit Guarantee Corporation, the government’s under-funded safety net for employees.

* Finally, Americans have one of lowest savings rates in the world—a rate that fluctuates between a few percent to a negative few percent.

   President Bush wants to simplify the existing web of tax-preferred savings accounts for retirement, health care, and education. His budgets for 2003, 2004, 2005 and 2006 included proposals for various tax-free savings accounts that would replace the country’s existing tax-favored accounts—among them, IRAs, education savings accounts, and 401(k)s. Each time, legislators rejected the President’s proposals.

   In addition, both the Senate and the House have proposed numerous pieces of pension reform legislation over the past decade, none of which has been passed into law.

   Most recently, two pieces of legislation were under debate—The House of Representatives’ Pension Protection Act (HR 2830) and the Senate’s Pension Security and Transparency Act of 2005 (S 1783).

   Late last year, HR 2830 passed the House and S 1783 passed the Senate. This year, legislators convened a Conference Committee to iron out differences between the two bills. Passage of pension reform legislation was a top priority for the 109th Congress during its second session, which runs from January to August.

   Most of joint bill addressed closing loopholes that have led to the massive underfunding of employer-sponsored pensions, which cover 44 million Americans. Another goal was to cut the risk that the federal agency insuring pensions—the PBGC—will need a taxpayer bailout. Some provisions dealt with 401(k)s, the retirement savings plans increasingly being offered by U.S. employers in place of defined benefit pensions. The primary issue was personal investment advice, which both the Senate and House bills support.

   After much wrangling over tax cuts that had been appended to one of reform bills, pension funding relief for the airline industry, and the legal definition of cash-balance defined benefit plans, which are a hybrid of defined contribution and defined benefit plans, legislators presented the Pension Protection Act of 2006 (HR 4) to President Bush, who signed it into law on August 17.

   The Pension Protection Act strengthens the federal pension insurance system by requiring companies that under-fund their pension plans to pay additional premiums; extending a requirement that companies terminating their pension plans provide extra funding for the pension insurance system; requiring that companies measure the obligations of their pension plans more accurately; closing loopholes that allow under-funded plans to skip pension payments; raising caps on the amount that employers can put into their pension plans, so they can add more money during good times and build a cushion that can keep their pensions solvent in lean times; and preventing companies with under-funded pension plans from digging the hole deeper by promising extra benefits to their workers without paying for those promises up front.

   The Act also contains provisions to help American workers who save for retirement through defined contribution plans such as IRAs and 401(k)s. The legislation: removes barriers that prevent companies from automatically enrolling their employees in defined contribution plans; ensures that workers have more information about the performance of their accounts; provides greater access to professional advice about investing for retirement; gives workers greater control over how their accounts are invested; and makes permanent the higher contribution limits for IRAs and 401(k)s that were passed in 2001, enabling more workers to build larger retirement nest eggs.

Social Contract

Finally, reform proponents are revisiting the historical social contracts in their countries. Every nation has legacy social security and pension obligations. On the surface, they simply are national policy. Underneath, however, they represent a country’s value system.

   For decades, the social contract between governments and citizens and employers and employees has been if you work hard for us, we will take care of you in retirement. Opponents of this historical contract call it paternalistic and unaffordable. Proponents call it ethical and honorable. Regardless, over the past decade, the contract is slowly dissolving around the world, as corporations jettison defined benefit plans and governments privatize social security and pension schemes.

   So, we all are asking ourselves the same questions. What responsibility does a government have for its citizens? Does an employer have for its employees? Do the affluent have for the less-well-off? Do we have to our parents and to our children? Our answers will have a profound effect on who foots the bill for the next wave of retirees around the world as well as their heirs.

   Savvy financial services players aren’t waiting around for the answers. Instead, they are focusing on developing innovative products to fill the gap between what an individual’s employer and government will offer in the way of pension income and what he must fund himself.

   U.S.   financial services companies—especially insurers—are taking the retirement product innovation lead, driven mostly by the 77 million Baby Boomers (Americans born between 1946 and 1964)  who began to enter the retirement pipeline in January (see Forever Young, Resource, April 2006). Another Boomer turns 50 every eight seconds. Today, 38 percent of the U.S. population is 50 and older; by 2020, that group will comprise 47 percent of the population.

   Lincoln Financial, Hartford Financial, Fidelity Investments, Wachovia Corporation, and Ameriprise Financial were among the first companies to re-tool operations, tweak the brand, and develop new products for the retiring Boomer. Today, you’d be hard pressed to name a leading American financial player that’s not targeting the Boomers.

   To address the distribution phase of retirement, American financial services players are:

* Adding all manner of bells and whistles to their annuity products, including institutional (versus retail) pricing, income withdrawal guarantees, spousal withdrawal benefits, and laddering—that is, an opportunity to purchase retirement income every year instead of all at once, which leverages the principles of dollar-cost averaging.

* Offering financial advisor services, such as Fidelity’s Retirement Income Advantage, which helps customers plan for their spend-down phase.

* Offering systematic withdrawals.

* Developing mutual funds that mimic a retirement portfolio. Known as “funds of funds” these asset allocation funds create an investment portfolio for the 50-plus investor and rebalance assets automatically.

* Selling longevity insurance, which acts like an annuity, but is not one. A new product offered by very few companies—among them, The Hartford and MetLife—it kicks in long after purchase and is meant to provide a safety net.

   The challenge of funding retirement programs for the aging Boomer population is not limited to the U.S. , of course.  Within a century, the number of people over age 65 will outnumber all other age groups in developed countries, including Australia and countries in Western Europe , according to The Future Retired: Facts, Figures, and Issues for Insurers, Retail Brokers and Financial Advisors, a new TowerGroup report by Cynthia Saccocia, research director of the consultancy’s insurance practice. She points out that as the Boomer generation retires, the public and private retirement and healthcare systems currently in place will become less viable and, without a concerted effort from both the public and private sector, many countries will inherit substantial financial burdens from their aging population with long-term negative consequences.

As you can see, governments around the world are taking steps to both shore up and dismantle their public pension programs. In the meantime, financial services companies are crafting products and services to fill present—and potential—gaps. Resource will keep you posted on their progress.

Contact Resource at resource@loma.org