Learning lessons from the US long-term savings industry

Don't get me wrong, there is a lot to like about the US and I recently enjoyed a pensions tour of the States in the weeks prior to the recent tariff announcements. I met around 100 people in five states over the course of a week and one of the main points that struck me after meeting the great and the good of the US long-term savings industry is the fact that the UK has also imported many of the same market dynamics and customer trends that are now at play here, only they are at least ten years ahead of us.

With that head start they have solved for a number of the problems we're grappling with in the UK today while there are also plenty of issues that are yet to be resolved and here are a number of the key observations.

DB closure acceptable in the 80s

While the first term of the Blair/Brown government and the decision to abolish dividend tax credits is often cited as the beginning of the end for private sector defined benefit provision here in the UK, the process was underway stateside under President Regan.

Between 1980 and 2008 the proportion of private sector workers participating in a defined benefit (DB) scheme halved from around 40% to 20%[1] which sparked a corresponding boom in pension risk transfer activity as part of a market that traces its history back further than on this side of the Atlantic.

Greater DC adequacy but only for 50% of the population

The 401k system that replaced DB has had mixed results. On the one hand average retirement savings for those aged 55-64 are as high as $540,000 [2] across DC and DB entitlements while the equivalent UK figure is closer to £140,000[3]. This headline figures does, however, mask huge variations in outcomes. The success of auto-enrolment here means around 80%[4] of people have a pension, while in the US fewer than 50% do[5]. Just 12 states have introduced automatic enrolment and for those with access to it contributions are much higher at 14%. Interestingly opt-out rates from the US version of AE are similar at c10% but where pensions are provided but without automatic-enrolment, just three in ten people take them up.

Small pot solutions despite patchy DC provision

While the UK has been grappling with how to tackle the proliferation of small pots, the US has grasped the nettle and introduced ‘auto-portability' which enables small pots to move with you to your new employer in much the same way the pot follows member concept would have worked here. Feedback from those I spoke to suggested it was an effective, if fairly slow, solution to the problem.

A more seamless transition into retirement

Ten years on from the introduction of the pension freedoms government and industry here have recognised that people need greater support at the point of retirement with the thorny issue of how best to access and maximise their savings. Default decumulation and enhanced guidance in the form of targeted support look to be on the way.

In the US a form of default decumulation already exists through what's known as required minimum distribution rules that automatically start to pay out an income from savings and which is typically backed by a multi-asset fund. The demographics in the US see ten thousand people turn 65 every day so this a system that is operating at scale and one the government may look at as it legislates for default decumulation in the forthcoming Pension Schemes Bill.

Greater access to advice

The population of the US is around five times the size of the UK but they have ten times as many financial advisers. This of course reflects the large number of wealthy individuals in the US but also the setup of the advice industry which has been successful at fostering both lifelong and intergenerational client relationships and an ability to seek out transactional advice at key life moments.

There is a stark fact that advised relationships are only broken very infrequently with 99% retention levels in certain cases which suggests high degrees of trust and professional standards. This personalised approach clearly works from a retention and customer satisfaction perspective and there are lessons for us here around how to close the advice gap. Initiatives like targeted support are more likely to succeed if we can make it feel as personalised as possible, without straying into full advice.

Private market specialism

At a staggering $35trn[6] (£25.4trn) the store of wealth in the US pensions market is massive and greater than the next 20 markets combined. This scale is one of the bedrocks of the country's incredibly competitive asset management industry which has developed a host of managers with specialism in private market investing. There is a stark difference in the UK which has the lowest private market investment of any mature system and where government reform is hoping to change this. In the US private markets represent a mature range of asset classes from private credit to private equity and these investments help finance real world projects in sectors like defence technology, AI and energy infrastructure.

Conclusion

Touring the US it is hard not to be impressed by the scale of the country and its financial services industry. It has a multi-trillion dollar industry that leads the world but also highlights an all or nothing culture in terms of saving and how money is saved.

We often look to the US for innovation and this was evident on several fronts from the accessibility of advice, the use of technology to unite people with small pots and in the maturity of the investment solutions at play in both the accumulation and decumulation phases. With the UK pensions landscape in flux, a packed government reform agenda ahead, and ever-evolving customer needs, I'll be drawing on insights from my travels to help steer through this period of change in the months ahead.

Tom Ground is CEO of Retirement Solutions at Standard Life, part of Phoenix Group