By Tom Murray, Head of Product Strategy, Exaxe.
Government support has focused on supporting savings via ISAs, auto-enrolling large numbers into defined contribution pensions, and providing guidance for the many affected by the advice gap resulting from the implementation of the Retail Distribution Review (RDR).
One could be forgiven for thinking that actuaries were being made the scapegoats for the financial events of the last decade; it was almost as if the staggering increase in longevity which undermined so many DB schemes and the low interest rates imposed by the global financial crisis were directly the result of the actions of the actuarial profession. But whatever the reason, the result has been a decade of increasing focus on personal savings that have resulted in individuals carrying much higher amounts of risk than heretofore.
All this is now changing. After a decade of personal savings, the auto-enrolment of large sections of the population into defined contribution plans, and the introduction of pension freedoms to allow individuals to manage their own retirement savings, the result has been a lack of the very financial security that drives people to buy financial products in the first place.
As a result, there has been a shift back to appreciating the benefits of pooled plans and a re-evaluation of the value of pooling risk rather than managing it on an individual basis. Across 2018, the ABI reported strong growth In the group and individual protection markets. For example, Iress reported sales of term life products growing by 33% in the first 9 months of the year with a 22% increase in the sales of income protection in the same period.
This level of growth seems to indicate that rather than try to personally accumulate enough money to survive any adverse change in circumstances, people are starting to see the benefits again in pooling the risk with others by purchasing protection products rather than try carrying the risk themselves.
Similarly, in the pensions world, there is signs of a big change in attitude. Whereas mid-decade, the focus was very much on people wanting to take control of their own retirement finances, there has been a switchback in sentiment. The tempting idea that one can manage to outperform the professional investment management groups in terms of returns was always going to be an idea that looked good on the rack but far less suitable when tried on.
When introduced, the pension freedom legislation almost wiped out the annuity market as retirees felt they could manage their own future finances more efficiently for their retirement years. The collapse in the sale of annuities that resulted has now bottomed out. While sales are not back at the levels they were before the introduction of pension freedoms, they are growing significantly again, as people realise the key role annuities can play in providing financial security in retirement - financial security being a key driver for the elderly.
And while defined benefit schemes are unlikely to make a come-back anytime soon, there is much interest in the new approach being taken by Royal Mail, the collective defined contribution plan or CDC for short. The key here is that contributions are fixed so the employer cannot end up with the kind of liability that plagued the DB schemes. However, the employees get a targeted pension for the rest of their lives and therefore manage to pool the investment and longevity risks associated with pensions. This means that they are back thinking of pensions in terms that they were always used to – a wage in retirement for the rest of their lives, albeit as a target wage rather than at a guaranteed level
This move to a more pooled approach shows that the original idea of insurance is making a comeback – spreading the risk in order to provide oneself with security. And with it, the role of the actuary re-emerges as a key player in making all these approaches work. For protection products, annuities and CDC pension schemes are all heavily reliant on the traditional actuarial skills in order to manage the risk on behalf of the customers.
It just shows – wait long enough and even actuaries come back into fashion.
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