There's only one overarching risk in pensions: not having enough money to meet your needs later in life.
Underneath that, there are several uncertainties, like how much money you will need, how certain you are that you will get that money, and how long you’re going to live. This session at the Annual Conference will look at these big picture risks and how they will be managed in future. Insurers are well placed to help people navigate these risks. But whether they do that by pooling them or by helping individuals to manage their own risks is a matter of debate.
Pensions policy has been pulling in opposite directions for years, with a tension between the desire to pool risks, so that the individual needs to do as little as possible; and enabling individuals to make decisions for themselves. It has become a cliché to point out the conflict between the inertia harnessed by automatic enrolment and the decision-making required by pension freedoms.
There are several current examples of this tension. The Government is consulting on consolidation of defined benefit schemes, and on collective defined contribution schemes, which both look at different ways of pooling the risks, but with a reduced liability for employers. On the other hand, the FCA’s Retirement Outcomes Review, and its joint strategy with The Pension Regulator, both focus on customer decision-making and ways to make savings and retirement decisions easier.
It can be argued that this tension is not a problem, and these policy initiatives simply reflect the different aims of the different worlds of occupational and retail pensions. But these worlds continue to collide as different parts of the market converge and employers have less appetite to take on risks. This is best illustrated by the ongoing issues around transfers from defined benefit to defined contribution schemes. It’s widely accepted that for some people, it makes sense to leave behind a guaranteed income in exchange for more flexibility. But when that is and is not a good idea, and the process the individual goes through to decide, remains a source of contention.
There are steps we feel need to be taken to leave the industry clearer about the future and which we will discuss at our breakout session. First, there is a need for honest debate about the risks involved in pensions: in DB, in DC, and anything in between. Savers, providers, policy-makers and employers need to be clear about the risks that we all face.
Second, there is a need for consistent and joined-up regulation. The FCA-TPR joint strategy is an important step forward but there is more work to do. It makes no sense to create new regulatory structures just to avoid the risk aversion of the existing regulatory structures.
Third, there is a need to take advantage of, and better define, the role of data and technology. Tech can help us manage risks either as individuals, schemes or providers.
It can help identify individual circumstances, preferences and risks and either recommend, or automatically adjust, investments or income. The industry and policy-makers could do more to make this happen.
Finally, it’s important to keep the end in mind: whether or not people are able to make decisions for themselves, they should still reach a good outcome and have enough money to meet their needs in later life.
Find out more at the ABI Annual Conference 2019. Book your tickets now.