Enterprising Investor Podcast Summary Episode: Rich Newsom, CFA: Lessons from Top-Ranked Political Systems
Release Date: November 15, 2024
Host: Ryan Munson, Research Manager, CFA Institute
Guest: Rich Newsom, CFA, Executive Director, Investments and Chief Investment Strategist, Mercer

Introduction

In this episode of the Enterprising Investor, Ryan Munson hosts Rich Newsom, CFA, to discuss insights from the 2024 Mercer CFA Institute Global Pension Index. With over three decades of experience, Rich delves into the factors that contribute to robust pension systems, the challenges faced by underperforming countries, and the pivotal role of innovation and investment professionals in shaping sustainable retirement solutions.

Overview of the 2024 Mercer CFA Institute Global Pension Index

Rich Newsom introduces the 2024 Mercer CFA Institute Global Pension Index, highlighting its 16th iteration and CFA Institute's fifth-year partnership. The index assesses 48 retirement systems worldwide based on adequacy, integrity, and sustainability. This year's focus emphasizes the shift towards defined contribution (DC) savings plans and the resultant transfer of investment risk from funds to individuals.

"The index underscores the growing importance of financial security in retirement, especially as populations age and economic pressures increase."
— Rich Newsom [01:54]

Key Features of Highly Ranked Pension Systems

The discussion identifies common characteristics among the top eight ranked pension systems, excluding the Netherlands. These systems typically combine a minimum safety net—centrally funded and defined benefit in nature—with an individual account savings program akin to DC plans. This dual approach ensures a foundational level of security while promoting personal responsibility for retirement savings.

"The eight highest-rated systems all have a minimum safety net funded from general revenues and an individual account program that places investment risk on individuals."
— Rich Newsom [03:07]

Despite the Netherlands maintaining a defined benefit system, societal debates have led them to transition towards collective defined contributions, mirroring trends in other top-performing nations.

Political Will and System Design

Rich emphasizes the critical role of political will in sustaining and reforming pension systems. In countries with individual account schemes, pension issues remain a front-page political topic because they directly impact every working voter. This pervasive visibility fosters a collective commitment to reform and improvement.

"Because every working voter has an individual count, pension reform becomes a constant part of political dialogue, ensuring broad-based support for necessary changes."
— Rich Newsom [05:26]

In contrast, nations relying heavily on pay-as-you-go systems see pension issues as less immediate, resulting in lower political prioritization and reform momentum.

Challenges in Underperforming Systems: The U.S. Example

Focusing on the United States, Rich highlights a paradox: despite being a global economic powerhouse, half of U.S. households lack retirement savings beyond Social Security. With Social Security projected to face funding shortfalls by 2033, the system receives a C+ grade, ranking 29th out of 48 countries.

"The U.S., while economically strong, ranks below the median in retirement income security due to half its population relying solely on Social Security."
— Rich Newsom [08:09]

Key issues include:

• Declining worker-to-retiree ratio: From over five active workers per retiree in 1960 to approximately 2.8:1 today.
• Increased life expectancy: Retirees now live significantly longer, stretching Social Security resources thinner.
• Lack of concrete reform proposals: Political hesitation to tackle the "third rail" of Social Security reform.

Rich criticizes the rigidity of the pay-as-you-go model in the U.S., noting its difficulty in adapting to demographic and economic changes compared to systems that blend safety nets with individual savings.

Innovations in Pension Systems

Despite challenges, Rich remains optimistic about recent innovations, particularly the introduction of pooled employer plans (PEPs) in the U.S. These plans enable small employers to aggregate their DC plans, benefiting from economies of scale and professional management.

"Pooled employer plans are transforming the U.S. retirement landscape by reducing costs and enhancing the quality of DC offerings for small employers."
— Rich Newsom [14:24]

He points to successful implementations in countries like Australia, where similar structures have scaled to manage vast assets efficiently, suggesting a bright future for PEPs in enhancing retirement savings accessibility and effectiveness.

AI and Digital Transformation in Retirement Planning

AI and digital technologies are revolutionizing both the accumulation and decumulation phases of retirement planning. Rich discusses how AI enables:

• Mass customization of financial advice
• Smart defaults and nudges to guide investment and spending decisions
• Enhanced productivity for human advisors, allowing them to manage more clients effectively

"AI is not replacing human advisors but augmenting their capabilities, enabling a curated and integrated financial experience for individuals."
— Rich Newsom [19:39]

He underscores the concept of "AI plus HI" (Human Intelligence), where AI tools complement human expertise to provide personalized and efficient retirement solutions. This synergy is essential for building trust among retail investors, who may be skeptical of AI-driven advice.

"It's the artificial intelligence plus human intelligence that can actually use that application in the right way to achieve better outcomes."
— Rich Newsom [25:09]

Role of CFA Charterholders in Pension Reform

Rich highlights the pivotal role of CFA charterholders and investment professionals in improving pension outcomes. By directing capital towards high-return, risk-adjusted opportunities, they enhance economic productivity and generate wealth that supports sustainable retirement systems.

"CFA charterholders are instrumental in making the economy work better, which in turn creates the wealth necessary for robust retirement, healthcare, education, and other critical sectors."
— Rich Newsom [26:03]

He emphasizes that their expertise not only benefits individual clients but also influences broader economic policies and investment strategies globally, contributing to poverty reduction and economic growth.

Conclusion and Final Thoughts

Rich concludes by reaffirming his optimism about the potential for reform and innovation within pension systems, particularly in the U.S., where ongoing bipartisan efforts like the Secure Acts signify progress toward expanding retirement coverage and enhancing system sustainability.

"Long-term savings reform is achievable in the U.S. with bipartisan support, as evidenced by the Secure Acts and the growing adoption of pooled employer plans."
— Rich Newsom [16:13]

Ryan Munson wraps up the conversation by commending the partnership between CFA Institute and Mercer, expressing anticipation for future editions of the Global Pension Index.

Notable Quotes:

• [01:54] "The index underscores the growing importance of financial security in retirement, especially as populations age and economic pressures increase." — Rich Newsom
• [03:07] "The eight highest-rated systems all have a minimum safety net funded from general revenues and an individual account program that places investment risk on individuals." — Rich Newsom
• [05:26] "Because every working voter has an individual count, pension reform becomes a constant part of political dialogue, ensuring broad-based support for necessary changes." — Rich Newsom
• [08:09] "The U.S., while economically strong, ranks below the median in retirement income security due to half its population relying solely on Social Security." — Rich Newsom
• [14:24] "Pooled employer plans are transforming the U.S. retirement landscape by reducing costs and enhancing the quality of DC offerings for small employers." — Rich Newsom
• [19:39] "AI is not replacing human advisors but augmenting their capabilities, enabling a curated and integrated financial experience for individuals." — Rich Newsom
• [25:09] "It's the artificial intelligence plus human intelligence that can actually use that application in the right way to achieve better outcomes." — Rich Newsom
• [26:03] "CFA charterholders are instrumental in making the economy work better, which in turn creates the wealth necessary for robust retirement, healthcare, education, and other critical sectors." — Rich Newsom

This episode provides a comprehensive analysis of global pension systems, emphasizing the interplay between system design, political will, and innovation. Rich Newsom's expertise offers valuable perspectives for investment professionals and policymakers striving to enhance retirement security worldwide.