Nigel Aston

State Street Global Advisors, the asset management arm of State Street Corporation (NYSE: STT), has announced that it has defined a ‘formula for retirement happiness.’

In a new research paper, entitled The Global Retirement Reality Report: The Happiness Formula, State Street Global Advisors compares objective rankings of various retirement systems with qualitative results from a survey of over 9,400 respondents in eight countries^[1] .

It found that the retirement structures with the highest objective rankings did not necessarily correspond to the happiest respondents.

For example, the Netherlands consistently ranks as one of the strongest retirement systems in the world; it has the highest Melbourne Mercer Global Pension Index ranking and maintains a very high level of coverage, participation and savings rates. However, State Street’s data shows the Netherlands to have one of the lowest levels of satisfaction in retirement of all the countries surveyed. Meanwhile, in the US, those savers in a Defined Contribution (DC) plan are very confident and optimistic about their prospects and indeed are generally happy in retirement, despite comparatively low levels of saving and a low index ranking.

The report found that the key factors driving retirement happiness were a combination of trust in a country’s retirement system stability, a strong feeling of ownership regarding their own retirement savings role and being well prepared in terms of accumulated retirement assets.

Here are the key findings from the report:

• Stability and credibility of a country’s retirement system engenders trust whereas recent change or the expectation of change at the policy level, such as alteration of retirement age, erodes trust. For example Italy has recently undergone painful reforms to the pension system and Germany and the Netherlands are on the cusp of reforms; this erodes trust. However, if these reforms are successfully implemented and individuals embrace their roles in the new system, these countries could look more like Sweden (one of the happiest retirement countries) with an established and well-understood, sustainable system.
• Individuals who embrace ownership of, and feel that they have control over, their retirement outcomes are happier. If people accept that they are responsible for their retirement and understand the choices that they can make, they feel more secure. Respondents in the US and Australia, where there is a long tradition of individual retirement responsibility through DC savings, were the happiest in our survey. Despite having lower assets, the UK and Ireland have potential to be moving towards these models
• Having sufficient retirement assets is critical in determining retirement readiness and satisfaction. The challenge faced by many is determining how much is “enough” and understanding whether savings will be sufficient. In addition, the study highlighted that few people understand how to convert a relatively large lump sum into a dependable income for life, making the definition of sufficiency elusive. Italian and Irish respondents, in particular, were concerned that they were not prepared for retirement.

As a result of the findings, State Street recommends the following key takeaways based on the happiness formula:

• Trust: Keep retirement plans as simple and stable as possible: Avoid making changes, or when changes have to be made, communicate them well in advance and provide clear and comprehensible illustrations of the probable impacts.
• Ownership: Build workers’ confidence in owning their retirement destiny and reward good behaviors: Encourage engagement and increase ownership by illustrating the impact participants’ actions can have on their retirement readiness, such as changing their savings rate, retirement age or investment allocation can. Providing easy access to trustworthy sources of guidance – whether online, in person, or by phone – is also important.
• Preparedness: Enable workers to assess the sufficiency of their retirement assets to help put retirement into perspective: Provide participants with clear income projections so that they can understand whether they are on track for a secure retirement and educate them on how much they would need to save to achieve certain goals

“As is the case with happiness more generally, there is not one driver, but several elements that combine to enable a happy and secure retirement,” says Nigel Aston, Global Head of DC Strategy and Proposition at State Street Global Advisors. “By observing retirement realities through the eyes of the individual saver, we are working to truly understand people’s experiences with state and institutional structures globally. By doing so, we can offer solutions that are as multidimensional as the needs of the people, plans, and policies involved. Happiness is important and evolving as our lives evolve.”

“From these findings, we hope to have arrived at a blueprint for a successful retirement structure that combines effective practices with rewarding retirement experiences, gathered from around the world,” said Jonathan Shead, Head of Retirement Solutions, Australia at State Street Global Advisors. “With this study, we are looking to identify the factors across a number of retirement systems that drive retirement happiness. In doing so, we are looking to create best practices that can be applied as retirement systems shift towards the DC model.”

[1] Germany, Italy, Netherlands, Sweden, Ireland, UK, US and Australia Press Release 11 October, 2018

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