Ravi Venkataraman, CFA
Senior Managing Director
Kristen Colvin, CAIA
Peter Delaney, CFA
Jonathan Hubbard, CFA
Senior Writer and Editor
Sean Smith, CFA
- 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.
Join MFS on the road
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
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@example.com.
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 firstname.lastname@example.org.
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.
Target date fund design and decision drivers: No such thing as a representative participant
Perspectives on how participant demographics influence glide path design.
The Road to Retirement Is As Important As the Destination
Kristen Colvin blogs about white label portfolios as a DC menu option.
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.
The views expressed in this report are those of MFS® and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.
Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.