“We must not cease from exploration and the end of all our exploring will be to arrive where we began and to know the place for the first time.”  T.S. Eliot
 
I am writing this article from Zurich – my new professional home. In some ways I have returned to where my journey started, after working in both the US and Asia.  Maybe it is a product of that homecoming of sorts, and the fact that this is the last in the Gullible’s Travels series, that I find myself reminded of Eliot’s lines.
 
For me, compiling this series has represented a very compelling intellectual journey. If I were to summarize the most important lesson from that journey, it is this: Employers must strive to design and deliver retirement programs whose perceived value equals or exceeds their economic value. Today, for many employers the opposite is in fact the case. 
 
Perhaps it is appropriate, therefore, that this final installment is coming at a unique point in time when human values themselves are evolving. In this article I share my thoughts on the seismic forces of political upheaval, economic instability and aging populations that are shaping people’s views on how best to manage the kind of life risks that retirement plans have historically been designed to protect us against. In so doing, my aim is to shed some light on what I believe will be the likely trajectory for retirement plan design in the 21st century.

Evolving values

In the US we have seen that an individual who in the year 2000 had difficulty getting into the Democratic National Convention has since risen to become the next president of the United States.
 
The springboard for that success is how strongly the values embedded in his campaign have resonated, not only with the America of today, but also with countries around the globe. Barack Obama’s message has been characterized by many commentators as one of shared sacrifice and shared responsibility.  As someone living outside the US, I find the difference between Obama’s approach to health care and that of John McCain’s particularly noteworthy. Obama describes health care as a right and therefore a cost and a risk that must be shared by society at large. McCain took the position that health care is more of an individual responsibility.  The parallel between this health care debate and that of defined benefit (DB - shared responsibility) versus defined contribution (DC - individual responsibility) could not be more pronounced. While it is always difficult to interpret the exact meaning of any election, certain suppositions can be made. Having witnessed the magnitude of Obama's victory as well as his overwhelming popularity on the world stage, I wonder whether his achievement might signal that the values of the global community are becoming more closely aligned with the shared social-responsibility approach than they have been in the past. 
 
The demographers also have a story of evolving values to tell: It would appear that the generation, now in their early adult years, what the demographers call the “millennials,” has values that differ from those of prior generations. The most striking difference is a greater emphasis on “we” and a little less on “me.”  In time, it is this generation that will come to dominate and lead the organizations in which we work.  What’s more, at the other end of the generational spectrum, we find that in most developed economies, the proportion of retired individuals is increasing. The role that the values of a larger older population will play in shaping the collective values of a society remains to be seen. It seems reasonable to speculate that shared responsibility will have a greater importance than individual success. If you accept this logic, then we are entering an era with large populations at either end of the age spectrum thinking more about the collective good.
 
One final observation on values relates to the response to the financial crisis. Countries acting on their own drew harsh criticism from leaders like Angela Merkel of Germany. Ms. Merkel, like others, was stressing the importance of a collective response.  So even in a global context we are seeing shared responsibility playing an ever-increasing role.
 
“So what?” you might ask.  Well, if working populations start attaching greater value to shared responsibility, then the philosophy at the heart of 401(k)/DC-type designs (that is,  “You’re on your own”) might start to sound somewhat dated. Fortunately, shared responsibility already has a clear-cut parallel in actuarial science: the very mathematical concept of pooling risks. In the world of retirement plan design, this concept is most commonly encountered in DB plan designs. The underlying rationale is that employers should be more willing to underwrite the primary retirement-related risks than individuals. By creating a shared risk pool that covers the whole workforce, the expected financial outcome becomes more predictable. 
 
Could this evolution in values mean that in future years we’ll see a strong trend back toward the DB plans of old?  Probably not. It could, however, translate to a significant slowing in the migration from DB to DC plans, as employers see their workforce placing increasing value on DB-type designs. Indeed, that slowdown may be facilitated by a stronger trend toward risk-sharing between employer and employee, instead of simply the risk transfer philosophy enshrined in DB-to-DC plan conversions. 
 
It could also signal an important evolution in DC plans, with perhaps increased pressure to make them more DB-like. This could manifest itself in a number of ways, and guaranteed return funds or funds offering smoothed returns may gain popularity. Employers may see greater pressure from their employees to use collective buying power to negotiate better and more creative terms for converting DC balances at retirement to include at least some longevity protection. 

The role of trust revisited

The liquidity crisis triggered in part by banks no longer lending to each other has served as an important reminder that money doesn’t make the world go around – trust does. Indeed one might argue that it is a massive erosion of trust that creates a recessionary environment in the first place.
 
In retirement terms, the erosion in the value of DC balances as a result of what has happened could easily translate to an erosion of trust between employee and employer.  What will happen within organizations that have introduced DC plans in recent years?  In some countries, the gap between the “haves” and the “have nots” has widened. In the retirement world, the “haves” are those who remain in legacy DB plans, while the “have nots” are often newer employees who have recently joined and are now members of the kinds of lower-cost DC plans discussed in the first article in this series. Many countries now have DC plans that have been in force long enough for meaningful balances to have been accumulated. 
 
In the context of a society, an increasing gap between “haves” and “have nots” often manifests itself in the form of a breakdown in trust in government, resulting in social unrest.  A similar phenomenon could occur within companies maintaining this DB vs. DC retirement plan disparity. For employees and their unions, recent events will bring into clear focus differences between the programs being offered by their employer to different generations.  The resulting erosion in trust could require a difficult return to the negotiation table.
 
Companies faced with such pressure to reassess the design of their retirement programs should realize they are entering negotiations with good opportunities to engage in give-and-take type bargaining. Challenging times should translate to an erosion of the “entitlement mentality”; workforces will want security - they will recognize that times are tough. 
 
For the “haves,” this could translate to a willingness to make concessions on the cost side, driven by a need for continued security and fears that the desire to cut costs may drive employers to the alternative of a pure DC arrangement. 
 
For the “have nots,” perhaps it will manifest itself as pressure to readdress the imbalance in risk-sharing, with employers being asked to take back some of the risk. As we learned in the first article in this series, companies have more financial risk-management tools available to them today than ever before. These could be used to manage design concessions.  Greater risk-taking by the employer could perhaps be traded for greater cost-sharing with employees. 
 
In uncertain times, trust between employer and employee plays an increasingly important role in levels of employee engagement.  Employees’ perceptions of their employer may change. In good times, they might see their employer as a means of accumulating wealth.  In bad times, the need for security can translate to employees seeking greater levels of guarantees in their labor contract. 
 
Arguably more so than any other element of a company’s total rewards spectrum, your retirement plan design has the best potential to engage your workforce in an emotive way and in the longer term.  After all, retirement plans protect your employees against some of the greatest risks they face in their lives:

Companies serious about increasing trust levels and, therewith, engagement levels may increasingly look to their retirement arrangements as a tool to support that effort. Success goes beyond changing the design of the plan itself; it extends to successfully packaging and communicating it so that the complex financial instrument - the retirement plan - can be understood and appreciated.   

More frugal times 

Most experts, including the International Monetary Fund, are predicting a global recession. This development points to a need for a fundamental change in the nature of the dialogue between employer and employee.  For some employers, this may simply mean a greater focus on cost control. 
 
To get value from every dollar spent, other employers may choose a different course:  addressing the gap that exists within the rewards programs, between their perceived value and their economic value. As we learned in the second article in this series, nowhere is this gap more pronounced than in retirement plans. 
 
Offering choice is a low-friction way to channel contributions to the benefits that employees value most. Involving employees in decisions generally increases perceived values. We might expect this trend to continue, perhaps through retirement plans playing a larger role in flex programs.
 
We should also see pressure on programs to lose some of their rigidity as they adapt to the needs of different groups and generations, possibly first in the area of how employees retire. Designs that facilitate phased and flexible retirement should gain more prominence, particularly in geographies or industries where the aging problem is most acute.
 
It will be interesting to see the extent to which global companies allow their local programs to be customized to the needs of their local populations.  Certainly, my travels have taught me how values vary from country to country and how those differences manifest themselves in different regulatory frameworks for corporate retirement plans. If companies become serious about customizing their benefit programs, this should inevitably translate to greater diversity in plan designs around the world.
 
In frugal times, employers may find it hard to enhance benefits. That doesn’t mean they can’t improve the packaging or some aspects of the package.  Significant opportunities exist to increase levels of perceived value simply by explaining to employees the value of what they already have.  Employers maintaining DB plans, in particular, will find the greatest potential to readdress the imbalance in the perceived versus the economic value. 

More regulated times

In the wake of massive interventions by governments in the operation of private companies, we can safely predict that we are entering an era where we can expect greater levels of regulation in the financial markets. Many of us have welcomed the direction that regulatory frameworks such as Basel II for banks and Solvency III for insurance companies have taken. A natural response to recent developments might be to dismiss these newer frameworks. I doubt this will happen.  Instead, I think we can expect greater rigor in their application. 
 
This could be significant for corporate retirement plans as their regulatory framework is likely to take a step forward based on the principles applied in the regulation of financial institutions. The implications of this on plan design are hard to predict at this early stage – it will depend on the regulations. If they are deemed onerous, they may prove a catalyst in the continuing DB-to-DC migration. If the regulations are reasonable - for example, supporting shared risk designs -  they may support companies in conveying a message of trust and security to their workforce.   

The nature of our destination

Well, the 21st century hasn’t as yet delivered on its greatest promise – the flying car. That being said, I think my iPhone is pretty cool.  Perhaps the promise of the 21st century will prove to be not one of technology, but rather one of evolving values. If the polls and the demographers are to be believed, these are values that put greater emphasis on shared responsibility. What’s more, we are entering an economic climate that may very well reinforce those values, with people increasingly worried about their own security and becoming more risk-averse.  What is clear is that we are entering a period of greater austerity, where every penny spent must count.  Moreover, if that penny cannot be made to count, then it will be taken away through measures to reduce employer cost and risk.
   
What does this mean for the design of retirement plans?  The answer is far from clear-cut.  There are forces at play that could lead to more sophisticated designs that rebalance the perceived value versus actual economic value equation through risk-sharing and other measures. There are also forces at play that point to more of the same, that is, a continued migration to DC plans and cost reduction. Inevitably, both sets of forces will play a major role in shaping plan designs in the years ahead. In simplest terms, this translates to a far more diverse future, a diversity that will be brought about by plan designs that:

  
So, my fellow travelers, our journey together has found its destination. For me, it has been a fascinating one. It started where all actuaries like to start, with numbers, but somehow found its way to an ending grounded in values. So, can I say I know this ending for the first time? No. For me, like the promises of this century, the promise embedded in the words of T.S. Eliot remains as yet unfulfilled. Perhaps this is not so surprising. Even in the short space of a year, the force of time and evolving values has changed the very home from which we started this journey and the place at which I have now arrived.
  
This alone may mean that we should all take a second look at the plan designs we thought appropriate just one year ago. Or maybe it points to a new type of destination that is to be found in this century - destinations are not places of perfect understanding but instead places where we find ourselves equipped with better questions. Indeed, it occurs to me that testing against the above principles may be more helpful to a complex multinational grappling with what plans to offer or change than adhering to a list of contribution rates or benefit details.
  
For my part, I can say that I will look to the future of our chosen topic with a profound sense of curiosity. For those of you who have traveled with us through the four articles in this series, I thank you for your sustained interest.  As I sign off, I will leave you with another Eliot quote to ponder:
  
“What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.”   

The author would like to especially thank Roberta Burns and Peter Bowers for their support in compiling the Gullible's Travels series.