Skydivers may fully understand the risks they face when they jump head first out of a plane. But it may surprise them to learn that, on top of all the risks associated with their white-knuckle pastime, and those associated with life in a global pandemic, they’re also carrying around a mounting weight of financial risk, perhaps without even noticing it…
Often considered to be at the opposite end of the risk tolerance spectrum are actuaries. So it may not surprise you to learn that the actuarial profession is currently completing a deep dive (wearing all the requisite safety equipment) into financial risk, in particular how a range of these risks have been transferred in recent decades from institutions to individuals.
The Institute and Faculty of Actuaries’ (IFoA) Great Risk Transfer project is looking at how megatrends, economics, cultural changes and public and regulatory policy have affected this transfer of risk in pensions, health, insurance and employment.
Anyone working in the world of pensions will no doubt see how the Great Risk Transfer fits with their experience of the industry and the changes it has undergone in recent decades.
Our interim report on the Great Risk Transfer identified three key areas of risk transfer that have occurred as the move from defined benefit (DB) to defined contribution (DC) provision has accelerated, and the Freedom and Choice reforms have been implemented:
- Savings adequacy – the risk that people do not save enough to adequately fund their retirement
- Investment risk – whilst building up their pension pots, and after entering drawdown
- Longevity risk – the concern (albeit not yet fully tested) that people will run out of money before they die.
Compared to, say, the 1990s, our modern day skydiver is now responsible for building her own pension pot, investing it appropriately, and making what she has at the end of her working life last until she dies (hopefully not in a tragic parachute-related accident).
This change, particularly when coupled with risks transferred in a range of other areas, could amount to a profound change in the way that she and other individuals organise their life and finances.
As an industry, and as a profession, we have a good understanding of what this problem looks like. The next phase of the Great Risk Transfer campaign will be to explore the regulatory and public policy interventions that could help to reverse this trend, or at least help equip people to better deal with the new risks they face. Auto enrolment, collective defined contribution (CDC) and pensions dashboards will all, no doubt, feature heavily in this next phase, as the IFoA explores how to equip people for a safe landing in retirement.
This article was featured in Pensions Aspects magazine November/December edition.
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