It’s already difficult explaining to clients or members what to expect in terms of benefit payments, but a growing number of options when it comes to retirement planning means the personal responsibility of members to achieve their required or desired post-retirement income is also increasing. But this doesn’t relieve pension providers of their duty of care to clients or members.
Multiple challenges for retirees
In the past, retirement income consisted mostly of DB pensions. As these were guaranteed to maintain the purchasing power and last throughout an entire lifetime after retirement, members were not burdened with an array of planning options and challenges. However, as the costs of DB schemes have increased significantly, due to aspects such as longevity and low interest rates, DC schemes are continually gaining ground. Within these schemes, it’s easier to respond to another trend: greater demand for freedom of choice, and thus more self-responsibility. A number of factors should be considered when making such important decisions, like Longevity, Inflation, investment risks and flexibility.
Guidance and planning tools can help members plan their retirement income considering these and other influencing factors. As post-retirement options vary from buying a lifelong, but nominal annuity to a risky, but guaranteed high and indexed pension, insights into the consequences of choosing each option are essential.
Essential components for retirement planning
The following components are key to providing guidance to help members with their choices in relation to retirement planning:
A holistic overview of all retirement income: Retirement income often comes from various sources like state pension, several pension benefits and other pension savings. To provide a clear overview of the total income after retirement these and any spouse income need to be considered. As the retirement dates of spouses may be different, it’s important to investigate if there are pension gaps over time. To enable clients and members a clear overview of their financial situation, data aggregation is becoming more important. Several initiatives which enable this via a digital platform make easier to immediately compile all relevant aspects of an individual’s financial situation.
Insights into the amount of income actually required: To ascertain whether the retirement income is sufficient, it’s essential to estimate what the expenses after retirement will be, investigating both the minimum required expenses and the desired expenses. With a hybrid retirement income consisting partly of an annuity and a more flexible but riskier drawdown scheme a client or member may actually achieve both goals at the same time. The expenses will include components like mortgage obligations, expenses for basic living costs, additional expenses to maintain the current lifestyle or any other specific expenses. Future personal expenses are easy to estimate or generalise and recent technological developments in the field of Artificial Intelligence and Data Analytics mean we can generate personalised expense profiles.
Scheme members need a clear overview of total income after retirement and what is actually minimally required. Pension providers can then guide their clients or members on which options are the best fit for their individual situation. By doing this, providers enable clients and members to plan for their future in an easily accessible way - advances in automated advice mean that this can be done in an even more personal and efficient way.
A challenge for pension providers
Providing the core information to members is very important, but communication needs to be improved to make messaging more interesting, relevant and intuitive. We are seeing the first steps being taken to provide better insight into the options and consequences affecting retirement income. In doing this, providers position themselves as a trusted partner to their clients or members – whilst cementing their position in the market.
Rutger de Wit - Business Specialist at Ortec Finance
