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Policy makers need to take stock of recent changes
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Managing financial risks now responsibility of individuals
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Individuals need help dealing with the big risk of running out of money in retirement
Nick Salter, President of the IFoA comments,
“With the shift from Defined Benefit (DB) to Defined Contribution (DC) schemes as the main retirement plan for pension savers, longevity risk, and therefore the need to manage it, has transferred to the individual. The new pension freedoms give individuals more choice about how to spend their pension savings: if they choose cash or drawdown, they need to be mindful of the risks of running out of money in retirement, for example, if they underestimate how long they will live. There are other risks individuals must also consider as they make retirement decisions. In particular, poor investment performance and higher than expected inflation can erode the actual and real value of retirement income. Annuities may have been perceived as poor value but they dealt with all these risks and there is still likely to be a place for them for many retirees.
“The reforms that came out of the previous Pension Commission’s report (Turner report) 10 years ago will increase the number of employees with access to employer sponsored retirement saving, but more should be done to ensure those employees understand what their savings are likely to deliver.
“The IFoA suggests that, if a new Commission is established, the focus should be on how to help individuals to understand the relationship between what they save during their working lifetime and the income those savings may provide in retirement, including how their decisions can help them manage the financial risk of how long they will survive in retirement. Helping individuals deal with the big risk of running out of money in retirement will be a vital ingredient to the successful outcome of the new pension reforms.”
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