DC Default Design: A Comparative Analysis of International Markets
In the ever-evolving landscape of defined contribution (DC) pension systems, it is crucial to examine and learn from the approaches taken by different countries.
In this article, we delve into the Mercer CFA Institute Global Pension Index 2023, which provides a comprehensive comparison of pension systems worldwide.
On an annual basis, Mercer, in conjunction with the CFA Institute, produce the Mercer CFA Institute Global Pension Index 2023 which provides a useful comparison of pension systems around the world based on a broad range of important criteria.
If we narrow the lens to consider the investment aspects of a DC default strategy in some of the largest overseas DC markets, it is clear that there’s no particular global consensus on the best approach to adopt (despite appearing to be broad agreement on the overarching objective to help members achieve income adequacy and sustainability throughout retirement). Notably, the Australian government is currently working to enshrine in law the purpose of their superannuation system with the proposed objective being to “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”1.
From an investment perspective, it is apparent that what emerges as typical best practice (or at least the industry standard) in any given region tends to be heavily influenced on how that particular market has evolved over time, as the disparity across regions highlighted by the table below demonstrates.
| Australia | US | UK | |
| Most popular approach | Relatively static glidepath | Target Date Funds | Lifestyles |
| Typical growth / defensive asset allocation split: 35 years from retirement | 70% growth and 30% defensive (with significant use of active management and diversification both across and within traditional and non–traditional asset classes) | Mixture of growth assets (largely equity), with around 15% of the assets allocated to more defensive fixed income. Passive management dominates but around a third is typically invested in actively managed mandates. | Majority of assets invested in passive equities with limited use of asset class diversification. |
| Typical growth / defensive asset allocation split: At Retirement | Static 70% growth and 30% defensive strategy is typically maintained up until retirement age. | Mixture of defensive assets making up around 70% of exposure with the remaining growth allocation largely being via equities. Passive management dominates but around a third is typically invested in actively managed mandates. | Between 5-15 years from retirement, assets begin to de risk into more defensive assets, including diversified growth funds, bonds and cash. The majority of schemes’ default arrangement target drawdown at retirement. |
It’s worth noting that, despite the significant changes experienced by the UK DC market since the introduction of auto enrolment, it is still relatively new when compared to the more mature DC markets such as Australia and the US. For example, the Australian superannuation system is now 30 years old and an astounding A$3.5 trillion (£1.9 trillion) in DC assets. Given a population of just 26 million – it is a great deal larger than that of the UK in asset size, for less than half of the population2. The Australian DC market has also benefited from a much higher minimum contribution rate (12% from 2025 versus a UK rate of 8% of qualifying earnings for auto enrolment), albeit the minimum contribution in Australia did start out lower at 3-4% in 1993.
These factors combined mean that different region specific norms and constraints have evolved when it comes to designing DC defaults in each of these countries. This emphasises how there is no ‘one size fits all’ approach to default design. However, we can still learn a lot from other DC markets across the globe when we look to designing the defaults of UK schemes. In particular, through utilising Mercer’s capabilities for DC in the global context we can design the solutions in the UK which aim to provide better member outcomes. One notable example of this is the use of illiquid assets in the Australian market – where defaults typically have around a 15-20% allocation to illiquid assets. Clearly, in the UK there is a long way to go before the majority of schemes adopt a material allocation to illiquid assets, however we can take learnings for the Australian market when we look to consider some of the benefits and challenges of investing in illiquid assets and ultimately how this could help drive better outcomes for members in retirement.
If you are looking for further information on our latest thinking on DC default design, and how this may apply to your scheme, please take a look at our published paper on this topic.
Sources
1. Legislating the objective of superannuation (Australian Government - The Treasury).
2. Australian prudential regulation Authority, June 2022.
- Investment Consultant