Global retirement

Mapping the future of pensions

The world’s defined benefit (DB) pension plans are traveling toward two very different futures. Broadly speaking, most corporate DB plans are being wound down and replaced by defined contribution plans, while most public and other non-corporate plans are taking steps to strengthen themselves for the long run.

A new study from BlackRock explores these two important trends side by side—something that is rarely done, despite the considerable attention given to DB plans and the trillions they invest. Based on a global survey of 300 DB pension funds as well as in-depth interviews with pension leaders, Common challenges, diverging paths delivers a unique perspective on the historic transition underway in how societies provide for retirement. It also complements BlackRock’s recent DC Pulse survey, which approaches some of the same fundamental issues from a defined contribution perspective.

Open and shut

The differences on the DB side start with the fact that while nine out of ten of the non-corporate DB plans that participated are open to new members, only about one in ten of the corporate DB plans is. Most of the corporations are moving their employees over to defined contribution plans, and as the DC Pulse survey shows, they recognize that the changeover calls for continued attention to the retirement preparedness of employees.

Many corporate funds are pushing to reduce risk in their portfolios and considering whether a so-called risk-transfer deal—whereby an insurance company assumes responsibility for some of the pension liabilities—might be a logical step. Public funds, meanwhile, are seeking to improve returns by taking advantage of their longer investment horizons and investing more in private markets such as real estate, infrastructure and private equity and credit.

Focus on fees

And yet corporate and public DB funds also have much in common. Both have had to get better at managing change, as the financial shocks of the 21st century gave additional urgency to their two journeys. Strengthening governance and revising investment policies have been priorities for both. Reducing the fees paid to investment managers and boosting efficiency are also common concerns.

Changes in DB pension investment policies
Percent of survey participants who took the steps below in last three years

Changes in DB pension investment policies

Source: BlackRock Global DB Pensions Report, March 2018. Base: Overall (n=268). Q: Which of the following steps has your organization taken to change its investment policy in the last three years?

Both corporate and public DB funds are also rethinking investment beliefs as markets evolve, reconsidering the respective roles of index-based, factor-based and alpha-seeking strategies. Both indexing and factor-based strategies continue to gain favor. Alpha-seeking strategies are still valued but are being applied with greater selectivity and attention to where they may be most effective.1

DB meets DC

Finally, both corporate and public DB funds are signaling that part of the solution to the current retirement challenges societies face may entail hybrid approaches that combine elements of defined benefit and defined contribution approaches. Already used in many markets and now adopted by 20 U.S. state plans, hybrid approaches look likely to spread.