An examination of the sustainability of the Australian, UK and US private retirement systems with seven recommendations for policymakers and industry.

Policy, structure and sustainability

Policy frameworks shape retirement system structures, and together these determine system sustainability. Retirement system sustainability is defined as the ability of plan boards and managers to be responsible investors, active stewards and allocators of capital to economic activities with desirable social and environmental outcomes. Policymakers often ignore the connection between policy, structure and sustainability when designing private retirement systems.

In this analysis, we examine the policy frameworks and important structural variables within the private retirement systems in the UK, Australia and US. In reviewing policy and structure, we aim to better understand the behaviour of various actors, their key challenges, and how retirement systems function overall. This, in turn, provides insight into how, or whether, systems facilitate desirable economic, social and environmental outcomes.

Through this research, we are building a global knowledge base to inform policymakers, academics, and industry about important sustainability considerations in the design of private retirement systems. We identify key challenges for specific national retirement systems and analyse comparative aspects in relation to policy and regulation, structure, governance and the role of service providers.

Desirable social and environmental outcomes

The primary objective of a retirement system is to provide financial security in retirement. In determining the extent to which national retirement systems deliver on this objective, the Melbourne Mercer Global Pension Index assesses national systems – state and private – based on three characteristics: adequacy, sustainability and integrity.Sustainability in this context means fiscal or funding sustainability and is based on, among other factors, funding levels, life expectancy, labour force participation and economic growth. These are all important elements. In this report, we introduce a fourth dimension; the extent to which system design allows retirement plan boards and managers to be responsible investors, active stewards and allocators of capital to economic activities with desirable social and environmental outcomes.

What do we mean by desirable social and environmental outcomes? The last couple of years have seen several examples of convergence between financial and sustainability policy as governments seek to meet the commitments of the Paris Climate Agreement, the UN Sustainable Development Goals and international obligations on human rights.2 The idea that the functioning of the global financial system is hinged on the sustainability of the economy, the planet and wider society is now more widely understood. Finance is recognised as instrumental in promoting sustainable development and growth, including the mitigation of, and adaption to, climate change. At the same time, the stability of the financial system and the performance of individual plans are contingent on the appropriate management of environmental, social and governance (ESG) factors in the investment process.

Over $40 trillion is held in workplace and personal pension plans. Investment is typically made on multi-decade time horizons, reflecting the retirement payments profiles of retirement plans. This creates a strong convergence of interests between sustainability policy priorities, which require long-term financing and capital reallocation, and retirement plans, which require sustainable long-term investment opportunities and risk management. In addition, policymakers and savers increasingly recognise that wellbeing in retirement depends on healthy social and environmental systems.3 Certainly, influential retirement plans with strong governance, resources, expertise and long-term outlooks on ESG issues can play a key role in ensuring that these issues are prioritised by the financial system overall.4