International Investment Fund Association IIFA study on the importance of investment funds in private and occupational pension plans
Internationally, the importance of defined contributions (DC) - pension systems is steadily growing. This pension system has an advantage over the pay-as-you-go system because it is more resilient to demographic changes. In many jurisdictions, for instance, the ratio of employees to retirees is declining. This means that fewer and fewer employees will have to finance an increasing number of retirees in the future, which will put the pay-as-you-go system in a critical position in many countries. In Switzerland, too, demographic changes are resulting in the AHV having to be increasingly funded by taxpayers.
This problem does not apply to DC systems in their original form. Here, every person or generation saves "for itself". Financial redistribution from one generation to the next is in principle not consistent with DC systems. The IIFA Pension Paper demonstrates that investment funds play a central role in DC systems. The returns generated by the capital markets and asset managers are - in addition to the contributions of employees and employers - of great importance as a "third contributor". Thus, the return on investment generated by investment funds, when used in DC systems, has the potential to reduce the burden on taxpayers as well as on employees and employers, and thus represents an important lever.
Investment funds are a proper vehicle of choice in DC systems, as they
- help also investors with little financial knowledge to build up pension capital in a lasting way
- are regulated and supervised products and thus have good governance
- inform the investor transparently about the risk-return relationship
- protect investors operationally against fraud in the best possible way
- support investors throughout their lives and help them achieve a wide variety of financial savings goals
- ensure competition among asset managers - the competitive environment and economies of scale lead to higher cost efficiency - for the benefit of investors.