Finding financial security: a 3 pillar approach

One of the primary factors shaping the future of financial security is the aging of populations in developed countries, where the majority of formal savings programs exist. As fertility rates fall and life expectancies continue to rise, there is an emerging imbalance between the number of active workers and the number of pensioners.

When the saving systems in developed nations were initially established, they were predicated on the assumption that the prevailing ratio of working age individuals to dependents would continue. However, as the ratio of working age individuals to dependents continues to fall, there are no longer enough workers to generate sufficient tax revenue/contributions to pay retirees. As a result, saving systems must adapt in order to ensure that pensioners receive adequate benefits to maintain their quality of life after retirement, while not placing an excessive burden on active workers. Further, as life expectancies continue to rise and defined benefit pension plans become less prevalent, individuals face a greater risk of outliving their savings.

The aging population in developed markets also has a significant impact on the existing pools of assets that are being accumulated to fund future pensions. Asset pools are beginning to mature and reach their decumulation phase, causing them to shrink in size and shift from government and employer-sponsored plans towards both active and retired individuals. This places a burden on individuals to manage their own assets, which many people do not have the financial knowledge or acumen to do successfully. The smaller size of individual portfolios relative to government or employer-sponsored plans will also limit the types of investment available to the individual and opportunities for the negotiation of investment fees. If savings pools remain fragmented, a larger proportion of retirement savings will be eroded by management fees.

Addressing this issue requires a 3-pillared savings approach, with governments, employers and individuals each having key responsibilities.


Pillar 1 – The Role of the Government

Governments must develop sustainable systems that will allow their retirees to maintain a suitable standard of living in retirement without placing unsustainable tax burdens on the general population. This can be done via tax-advantaged savings programs, which can be set up on a means-tested basis.

Governments can also be instrumental in combating the unwillingness of individuals to save for retirement. Mercer’s Healthy, Wealthy and Work-wise research shows that the inability to afford retirement savings is most common reason for not participating in pension programs. But compulsory savings schemes with auto-enrolment and auto-escalation provisions can bypass these concerns on the way to delivering critical benefits: not only do they require individuals to invest; they also create larger pools of assets, thereby minimizing governance and investment management fees.

Government-mandated regulatory changes are also critical to ensuring that individuals can invest with confidence. Requirements for increased transparency and reduced fees in savings vehicles offered by financial institutions help to improve consumer confidence in financial institutions and the ability of individuals to accumulate wealth.

Lastly, governments need to take on more responsibility for the financial education of their citizens. Most countries do not offer financial education as part of their standard post-secondary curriculum, leaving individuals to, at best, develop this knowledge on their own or, at worst, make poor and ill-informed investment decisions. Earlier exposure to financial concepts will facilitate better savings decisions in the future for citizens.


Pillar 2 – The Role of the Employer

Employers continue to play a critical role in ensuring retirement readiness for their employees. In the future, there will be more pressure on employers to sponsor institutional-quality savings solutions for their employees in an effort to improve their financial outcomes. The opportunity for employers to improve the quality of investment options for their employees is significant.

Beyond traditional retirement arrangements, many opportunities exist for employers to leverage financial wellness programs to meet the needs of their employees. The benefits of doing so for the employer are significant, given that employees in the US spend an average of 13 hours per month concerned about their financial health while at work, as is the opportunity. A resounding 79% of adults trust their employers to give sound financial planning advice.

Employers can use their financial wellness platform to integrate various financial services in a single source. Not only does this help personalize financial solutions to meet each employee’s needs, but it also provides a centralized source for employees when making their decisions. Some services that can be included in a financial wellness platform include:

  • Digital financial advice
  • Credit tools
  • Tools for managing student/other loans
  • Assistance with income smoothing
  • Cash-flow tracking tools
  • Budgeting tools

Increasingly, individuals are looking to their employers as a partner for shaping their financial future. Employers who take a holistic approach that leverages a financial wellness platform to take a lifetime view of savings will not only be able to attract better talent, but will also be able to make meaningful impacts on their employees’ retirement.


Pillar 3 – The Role of the Individual

The individual has the largest role to play in ensuring retirement readiness, as their propensity to save and comfort with investing have the most direct impact on their ability to retire. However, most individuals find dealing with immediate financial needs to be more critical than making retirement contributions. For example, 52% of American workers would find a $400 unforeseen expense difficult to cover. If individuals cannot meet their current unforeseen expenses, it is unlikely that they are saving adequately for retirement.

In order for individuals to enjoy good financial health there needs to be a focus on basic financial education and discipline. Education, whether provided through traditional schooling, employer-sponsored programs or self-study is vital to improving investment decision-making and overall confidence with investments. As the onus shifts more towards the individual to ensure adequate savings throughout one’s life, there needs to be a significant improvement in the level of financial literacy.

Individuals need to substantially improve their saving patterns if they wish to meet their retirement goals. More than two-thirds (68%) of individuals don’t expect to retire, but this concession can be avoided with better planning and long-term vision. Addressing this means changing the perspective of those entering the workforce, who view retirement as at least 40 years away. I Individuals who take a ‘slow and steady’ approach to contributions and investments will be better prepared, and governments and employers can assist by providing education and guidance on a broad scale and designing programs that ensure that employees accumulate wealth through mandatory contributions.



If any of the three savings pillars fails to do its part, there will be a significant risk that large portions of the population will lack adequate assets to retire. While there is some room for the burden of savings to be moved across the pillars, if each does not take a relatively equal responsibility, our aging population will not have sufficient savings to retire.

Cara Williams
by Cara Williams

Global Wealth Leader, Multinational Client Group, Mercer