 By Tom Murray, Head of Product Strategy, Exaxe
Lost in the deluge of journalistic outpourings regarding the Chancellor’s latest budget and the ‘Dawn for Freedom’ for retirees, was the fact that the Chancellor was basically saying that in future the estimation of how long one will live and therefore how quickly one can spend one’s retirement savings is down to the individual themselves, implying that people can and should take a DIY approach to the actuarial assessment of their own needs.
From being an extremely difficult profession that requires acute mathematical skills and many years of training and study, the profession appears to be regarded in the Treasury as something that can be undertaken by anyone.
Is this really how the Treasury view the actuarial profession? That someone can replicate the work involved with a calculator and a quick Google search? Or is it that they no longer care whether people’s pensions actually last for the duration of their lifetime?
The thinking behind the new strategy is not easy to fathom. On the one hand, there is the basic state pension to remove the means-testing trap and auto-enrolment to ensure that everyone has some level of private pension to top it up. This is designed to ensure that the state will not have to fund impossible levels of pension in the future with a much smaller active workforce.
On the other hand, there is this new approach that, having finally ensured everybody has a pension pot, the Treasury will now allow them to draw it down at whatever rate they want. This seems designed to throw a huge number of people back on the resources of the state a few years after they have retired.
So where does the actuarial profession sit amidst all this change? Well, obviously, there will still be a number of people who will want to buy annuities, the cautious types who are more concerned with the risk of running out of money than are actually tempted by the thought of a Caribbean cruise. However, according to a recent PwC survey, this market could decline by as much as 75%. This is a severe drop that will impact the industry and the type of products that need to be offered.
However, God rarely closes one door, but he opens another. The market is ripe for a rush of new products incorporating some type of guarantees that will bring comfort to those who are retiring. The exact nature of the products is still to be seen, but the need is there and it will be up to the actuarial profession to support the design of such products in such a way that they fulfil the need of providing value to the clients whilst giving the security of the old form of annuity.
There is another area that will require much ingenuity from the actuarial profession. That is the support of online tools and apps that will help the prospective retiree through the quagmire of retirement planning. Although the Chancellor has promised that “guidance” will be provided for all new retirees, the details of his plan are yet to emerge, as is the exact definition of “guidance”. The majority of retirees will not be able to afford the kind of detailed financial health check from an IFA that would be undertaken by the high net-wealth sector of society.
Therefore, this guidance will likely have to take a highly automated form. But it’s not only the official guidance that is likely to require automated support. Pension providers will need to make it easy for those who are trying to manage their own retirement areas to understand the products they have on offer and to reconcile them to the customer’s individual needs. Therefore automated tools incorporating actuarial assessments of longevity and fund performance are likely to be key offerings by most providers to this new self-investing section of the population.
Far more creative thinking will be required for these kinds of applications. Instead of an educated audience of advisors, these will be primarily used by those to whom the secrets of the pension world have up to now been an arcane mystery. Shedding light on those mysteries is likely to require a blend of the hard factual calculations provided by the actuarial industry with the softer skills of the multi-media professionals who are skilled in taking difficult matter and making it intuitively understood by non-expert users in the app and social website world.
While the Chancellor may have seemed to make the actuary redundant in the Brave New World of retirement planning, the reality is that the work of the actuary will be just as important as ever. The only difference is that the emphasis will be on collaborating with designers in order to work directly with the end consumer rather than via an expert intermediary.
Actuaries need to come to the forefront of this new era. The Chancellor has allowed everyone to manage their own longevity risk. The actuarial profession needs to find suitable ways to support the endeavours of the retirees who chose to take this path. A huge challenge but one that is more satisfying and more in tune with that technology is changing the way we live.
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