Retirement Systems Evolve: Focus on Defined Contribution Plans

Mercer, a business of Marsh McLennan, and the CFA Institute have released the 16th annual Mercer CFA Institute Global Pension Index (MCGPI), examining the evolving landscape of retirement systems worldwide. The report underscores the transition from defined benefit (DB) plans to defined contribution (DC) arrangements and the implications for future retirees.

The report indicates that the global retirement landscape is increasingly characterized by the move towards DC plans. The key distinction between a DB plan and a DC plan lies in their structure. A DB plan guarantees a fixed income, while a DC plan's income is influenced by factors like your contributions and the performance of the investment fund, according to Zurich.

“The ongoing shift to DC pension plans introduces many financial planning challenges, which are falling squarely on the shoulders of tomorrow’s retirees,” said Margaret Franklin, President and CEO, CFA Institute. “DC plans require individuals to make complex financial planning decisions that may significantly impact their financial circumstances, and yet many individuals are not well prepared to manage the required decisions.”

The MCGPI serves as a reminder of the gaps that remain in providing long-term financial security and advice for individuals. Despite the challenges posed by longer life spans, the flexibility and personalization offered by DC programs will be essential. As retirement systems evolve, many individuals are gradually transitioning into retirement or re-entering the workforce in different capacities, which DC plans can accommodate. 

“There is no single solution to getting retirement systems onto more solid ground,” says David Knox, Senior Partner, Mercer. Knox also called for collaboration among governments, policymakers, the pension industry, and employers to ensure that older populations can maintain a dignified lifestyle similar to their working years.

The Netherlands continues to lead the rankings for retirement income systems, with an index score of 84.8, followed by Iceland at 83.4 and Denmark at 81.6. The Netherlands’ success is attributed to its movement away from traditional DB plans to a more personalized DC model, supported by strong regulations and participant guidance, according to Mercer.

Several countries, including China, Mexico, India, and France, have pursued pension reforms in recent years. For example, Ariadna Montiel, Mexico’s Minister of Wellness, recently stated that the administration reaffirms its commitment to the population by continuing to strengthen pension and welfare programs. These programs are viewed as vital for the country's transformation and currently benefit 30 million households, including older adults, as reported by Mexico’s Government.