Managing Public Pensions in an Era of Change

As governments move their workers into new kinds of retirement plans, pension organizations are going to have to change a lot about the way they serve their members. They're going to have to learn to be coaches.
by | June 27, 2013
 

Public-retirement organizations are riding a wave of reform, including some movement away from traditional defined-benefit pension plans. Longer life expectancies, changes in pension-funding status, and economic and legislative pressures have fueled growing interest in defined-contribution and hybrid plans. These plans are a stark contrast to traditional defined-benefit plans, creating vastly different roles and responsibilities for the public-retirement community and retirees, and even remaking the relationship between them.

What does this type of transition mean for public-pension organizations and for members' retirement security? Successfully navigating this transition and sustaining viability over time means that pension organizations must make significant changes. They will need to deliver on their missions differently and move from a transactional focus to a new "coaching" role, helping members prepare for and manage their retirement. This shift will change pension organizations, service-delivery models, enabling technology and how overall system effectiveness is measured. Expectations will continue evolving, impacting relationships among retirement systems, retirees, working members, employers and other stakeholders.

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To take the pulse of the defined-contribution transition, Accenture surveyed decision-makers, influencers and professionals in nearly 100 pension organizations serving state- and local-government employees. More than half of the pension organizations surveyed offer multiple plan types. Nine out of 10 of those currently offer a defined-benefit plan, half offer a defined-contribution plan and one-quarter offer hybrid plans.

Respondents report that most members -- an average of 84 percent -- are currently enrolled in a defined-benefit plan. Forty-five percent of the survey's respondents predict that defined-contribution membership will increase somewhat over the next decade, while 16 percent see it increasing significantly; 35 percent expect hybrid plans to increase somewhat and 11 percent believe they will increase significantly.

These perspectives reveal that the public-pension community is clearly aware that change has arrived. While actual implementation may be a horizon issue for many, the shift represents a watershed with major implications for pension organizations that should not be ignored. Forward-thinking public retirement systems can smooth the transition by focusing on four areas, all of which are rooted in the emerging coaching role.

1. Taking care of members: The defined-contribution transition will require retirement systems to reinvent their customer service. As members transition to defined-contribution plans for which they must make investment decisions, pension entities will enter a whole new coaching paradigm where fostering members' financial literacy is paramount and essential to protecting their retirement security. Thirty percent of survey respondents believe that the need to counsel and train members is the most significant barrier to the defined-contribution transition. Filling this need will mean that pension organizations will have to hire financial educators who can assist members with risk and asset-allocation basics. Moreover, call center personnel must be ready to respond to members' questions that are very different from those they answer today.

2. Reshaping the organization: Change management will be a significant and continuous focus for pension organizations throughout the defined-contribution transition. The foundation of this will be staff reallocation and education initiatives. The current emphasis on back-office, transactional tasks will be replaced by new customer-service and member-education needs that are far-reaching in scope. The focus will be on understanding the right resource mix and staffing appropriately. In fact, 40 percent of survey respondents expect to hire new staff to support the transition. Even amid this change, however, organizations still will have to develop strategies to support defined-benefit plans, which, even if closed to new members, will continue for years.

3. Working in new ways: The changing relationship between pension organizations and their members will drive the need for innovation. Not only will members want more real-time communication, but they increasingly will be looking to digital channels, including mobile ones, to review and make changes to their accounts. Meeting members where they are will take on a whole new meaning and urgency. Pension organizations would do well to look to digital first-movers across the financial-services, retail and even health-care industries to adapt leading practices. Another innovation will be developing a data-driven culture in which analytics are used to assess performance. For example, analytics that revolve around member investment performance can measure the effectiveness of financial literacy initiatives. As pension organizations look to innovate, they will need to be realistic about the areas within and outside their core competencies. Success will mean either building new competencies or exploring sourcing arrangements with expert providers as needed.

4. Making the right IT investments: Over half of the survey respondents believe that they will have to upgrade their information-technology systems to support and sustain defined-contribution plans. They are right: Defined-contribution plans require a higher level of integration with external systems than do defined-benefit plans. In the defined-contribution model, a consolidated investment fund gives way to numerous individual investment accounts. Annual reports about fund status will no longer be adequate: Members will expect real-time access to individual account data, so internal pension systems will have to interact with external marketplace systems on a continuous basis. That means that pension organizations will need to make changes that may go beyond the experience of their IT staffs as they address the integration architecture and security issues associated with the real-time exchange of data. There are opportunities for public pension entities to garner leading practices from the commercial financial sector's years of experience managing the IT systems supporting IRAs and 401(k) plans.

In short, successful transitions from defined-benefit plans to greater use of defined-contribution plans will require substantial evolution of pension organizations' approaches to customer relationships, staff and management skills, and innovation and technology. Organizations that foresee such a shift should factor these requirements into their planning, and they should be doing that now.

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