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MFS® DC View
Defined Contribution Insights
April 2017
Investment
Solutions Group
Ravi Venkataraman, CFA
Senior Managing Director
Kristen Colvin, CAIA
Director
Peter Delaney, CFA
Director
Jonathan Hubbard, CFA
Director
Linda Nockler
Editorial Director
Jamie Coleman
Senior Writer and Editor
Bryan Potts
Senior Analyst
Sean Smith, CFA
Analyst
QuickFacts
• Over the past decade, global DC assets grew at a rate of 5.6% per annum. This compares to DB assets, which
grew at 2.6%, according to the latest Global Pension Assets Study from Willis Towers Watson.
• Demographic shifts extend average years in retirement globally. The combination of increased life
expectancies and lower average retirement age has extended average years in retirement from
13 years in 1970 to 20 years in 2014, according to the OECD’s Pensions at a Glance 2015.
• OECD projections indicate room for improvement in developed market income replacement rates.
In the OECD’s Pensions at a Glance 2015, projected income replacement in the United Kingdom,
Australia, Canada and the United States are 38%, 58%, 43%, and 45%, respectively. The developed
country average replacement rate is projected to be 63%.
• Default investment options play a critical role in DC pensions. The majority of member/participant
contributions to DC plans are invested in default strategies in the UK, Australia and the US. Be on
the lookout for our upcoming white paper to learn more about the growth and evolution of default
structures in DC globally.
Global DC landscape
The evolution of DC is in various stages around the world, but the overall trend continues.
2016
2010
Size of DC markets (US$)
US
UK
CA
DC market
DB/DC split
DC as % of GDP
Average age of retirement
10%
For more information,
please visit our website
at mfs.com/DC
DC market
DB/DC split
DC as % of GDP
Average age of retirement
20%
$516 billion
82% DB / 18% DC
19.50%
64 M / 62 F
40%
$6.9 trillion
40% DB / 60% DC
37.50%
66 M / 65 F
AUS
DC market
DB/DC split
DC as % of GDP
Average age of retirement
$72 billion
95% DB / 5% DC
4.70%
65 M / 62 F
30%
DC market
DB/DC split
DC as % of GDP
Average age of retirement
50%
60%
70%
80%
$1.3 trillion
13% DB / 87% DC
109.60%
65 M / 63 F
90%
% of retirement assets invested in DC schemes
Sources: Investment Company Institute (4Q 2016), Towers Watson Global Pension Assets Study 2011 & 2017, OECD Pensions at a Glance 2016.
Retirement outcome levers
Members/participants may need to increase contribution rates to make up for lower expected market
returns in the future.
Target vs expected DC account balance at retirement (US$ thousands)
1,200
1,000
800
Target savings
(70% replacement rate)
600
400
Projected assets
(assuming lower exp. returns)
200
0
US
Canada
UK
Australia
10.4%
9.6%
2.8%
2.3%
Additional savings %
to meet target
This is a hypothetical example shown for illustrative purposes only. An investment cannot be made directly into an index.
Target savings represents the present value of living expenses at the time of retirement using a discount rate equal to the local 7-10-year
government bond return expectation based on MFS Long-Term Capital Market Expectations (LTCME). Expected account balance assumes
participant contributions of 10% invested in a 60/40 relevant local equity/fixed Income portfolio over 44 years using MFS LTCMEs. See page 5
for more detailed assumptions.
Regulatory timeline
Regulatory trends in various markets have increased the importance of DC in retirement.
Australia, Canada, United Kingdom and the United States
CA
Quebec Voluntary
Savings Plan
introduced
AUS
AUS
Superannuation
Guarantee
implemented
Stronger Super Reforms,
which include MySuper
(low cost default product)
and Self-Managed Supers
(SMSF)
US
Pension Protection
Act enacted
2004
2007
2006
1992
AUS
Capital Accumulation
Guidelines introduced
CA
For more information,
please visit our website
at mfs.com/DC
2014
2017
Auto Enrollment
legislation
introduced
QDIA Regulation
finalized
US
Alberta DC legislation
introduced within
Employment Pension
Plans Act
Auto
Enrollment
fully
implemented
at 8%
default rate
DOL Fiduciary Rule
implementation
delayed 60 days to
June 2017
2012
2011
Choice of
Superannuation
Funds Act published
CA
UK
US
UK
Pension freedom
and choice reform
UK
2019
Super reforms
including an
A$1.6M transfer
balance cap set
to take effect on
July 1, 2017
AUS
Regional spotlight
United States and Canada
While the US and Canada share a common border, the two countries are at very different points in terms of the evolution of
their respective defined contribution markets.
Retirement income by source (%)1
4
Asset allocation (%)2
Other
1
13
10
35
32
10
Public pensions
Private pensions
18
Other income
41
41
6
7
7
8
10
Company stock
24
Balanced/Target risk
6
9
Fixed income
Cash/Capital
preservation
22
Investment
TDF
43
Employment
27
14
US
12
Canada
US
Equity
Canada
Sources: 1SSA Publication No. 13-11871 2015; Statistics Canada. 2EBRI Issue No. 426; Sun Life, Designed for Savings 2016.
DC assets
(USD billions)
DC/DB
split
Average
retirement age
Average
participation rate
Average member/
participant
contribution rate
Auto enrollment
utilization
United
States
6,965
60%/40%
65
78%
6.8%
41%
Canada
72
5%/95%
65
57%
4.3%
*
* L imited data available. Currently only in Alberta and British Columbia.
Sources: Investment Company Institute (4Q 2016); Towers Watson Global Pension Assets Study 2011 & 2017; OECD Pensions at a Glance 2015;
Vanguard, How America Saves 2015; Sun Life, Designed for Savings 2016; Great-West 2015 CAP Benchmark Report.
Key similarities
•
T hree pillar system: 1. government sponsored
retirement income, 2. plans offered by employers,
3. private savings
•
Investment menu design: i.e., TDFs plus core menu.
TDFs have grown to 22% of total DC
assets in Canada and 18% in the US.
•
B to DC: Trend continues toward Defined Contribution
D
plans
•
Focus on retirement income/drawdown solutions
Differences
•
egulation falls mostly under provincial
R
jurisdiction in Canada
•
Fees: Bundled pricing in Canada versus move toward
unbundled/a la carte pricing in the US
•
ome country bias is more pronounced in
H
Canada, especially in fixed income
•
Recordkeeper: DC recordkeeping market is much more
concentrated in Canada versus the US. Top
three recordkeepers control 65% of the market
in Canada versus 33% in the US
Sources: Sun Life, Designed for Savings 2016; EBRI Issue No. 426; CAP Suppliers Report 2015; Plansponsor 2016 Recordkeeping Survey.
For more information,
please visit our website
at mfs.com/DC
Join MFS on the road
MFS global DC presence — Experienced and diversified
Pensions & Investments
401k Investment
Lineup Summit – US
Hear MFS insights about effective
fund platform considerations and
standards and our global perspective
on developing an optimal default
fund structure during a four-city
tour with Pensions & Investments.
San Francisco, CA
5/9
Dallas, TX
5/11
Chicago, IL
5/16
New York, NY
5/18
http://www.pionline.com/conferences
MFS DC assets by asset class
EAFE/Global 42%
US equity 38%
• US$77b DC AUM
Multi-asset 10%
• Client types:
Corporate
Nonprofit
Health services & education
Union/Taft Hartley
Public/Local authority
Fixed income 6%
Regional 4%
MFS DC assets by country
US 71%
Australia/South Pacific 14%
MFS Investment
Management
DC Summer Solstice – Canada
Plan to join your MFS and industry
peers at the second annual MFS
DC Summer Solstice in Toronto on
Wednesday, June 21. This premier
DC event will feature interactive
discussions on current trends and a
networking reception. For more
information and registration
instructions, please email Amra
Jakupovic at [email protected].
DC and DB Forum – London
Please join us on Wednesday,
October 4, when we have a number
of experts from across the industry
discussing global retirement and
industry trends affecting both DB
and DC. These include governance,
consolidation and the importance of
investment returns. For more
information, please email Maddi
Forrester at [email protected].
For more information,
please visit our website
at mfs.com/DC
Canada 12%
• Vehicles:
Mutual fund
Institutional trust
Commingled fund
Subadvised
Separate account
UK/Europe 2%
Hong Kong 1%
As of December 31, 2016.
Insights & blogs
DC View: Year in Review 2016
This special edition of DC View includes a recap of
significant defined contribution events
throughout 2016, as well as an outline of what
we expect 2017 to bring.
Learn more
Target date fund design and decision drivers:
No such thing as a representative participant
Perspectives on how participant demographics
influence glide path design.
Learn more
The Road to Retirement Is As Important
As the Destination
Kristen Colvin blogs about white label
portfolios as a DC menu option.
Learn more
Balance at retirement graphic assumptions: Target savings represent the present value of post-retirement expenditures for 20
years at 70% replacement ratio of final salary using a discount rate equal to the relevant local 7-10 year government bond
return expectation. Expected balance assumes a 42-year investment horizon within the context of the MFS proprietary
Participant Investment Model. Retirement age assumed to be 67, while beginning contribution age is 26. Beginning
participant salary of $35,000 (at age 22); 2% annual wage growth over 44 years. The proxy portfolio is a 60/40 blend of
equities and fixed income and considers MFS Long-Term Capital Market Expectations (Jan. 17) expected returns. Contributions
are made uniformly over the course of a year; employer match is 50% of savings up to 6%; employee contribution of 10%.
Long-Term Capital Markets Expectations methodology: We use a proprietary top-down approach by employing quantitative,
country-based models as the foundation for our expectations and then integrating bottom-up fundamental views from our
global equity and fixed income investment teams to inform our final expectations. Our expectations are developed across 26
countries comprising 18 developed countries and 8 emerging market countries.
MFS equity market expectations are displayed in unhedged, nominal total return and are developed using a building-blocks
approach. Our long-term equity model develops return expectations in two stages: years 1 through 5 and years 6 through 10.
Deploying our model in two distinct stages allows us to use different parameters and assumptions for each forecast horizon.
In all stages, our model estimates both a price return and dividend return, which are aggregated to a total return expectation
at the country market level. The price return component is based on our expectations of future sales, margins and P/E
multiples; the dividend return component is based on our expectations of future dividends, which are based on expected
earnings and dividend payout ratios.
Elements of market history and mean reversion are incorporated into our model in both stages. Reversion speed and target
levels are calibrated based on our analysis of historical data and forward-looking expectations. The first stage of our model
examines current conditions and then assumes a healthy degree of mean reversion (particularly with respect to expected
margin and P/E multiple) as it estimates a market’s price and dividend return. In the second stage of the model, the mean
reversion parameters are relaxed, which results in more of a “steady state”-type forecast that picks up where the first stage
leaves off. It is important to acknowledge that there are a wide range of potential outcomes associated with our return
expectations. Any return figure should be viewed as the midpoint in that range of outcomes.
References to future expected returns and performance are not promises or estimates of actual performance that may be
realized by an investor, and should not be relied upon. The forecasts are for illustrative purposes only and are not to be relied
upon as advice, interpreted as a recommendation or be guarantees of performance. The forecasts are based upon subjective
estimates and assumptions that have yet to take place or may occur. The projections have limitations because they are not
based on actual transactions, but are based on the models and data compiled by MFS. The results do not represent nor are
they indicative of actual results that may be achieved in the future. Individual investor performance may vary significantly.
For more information,
please visit our website
at mfs.com/DC
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investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.
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