Way back in time, before the pandemic hit, the IFOA launched a campaign to better understand the transfer of risk from institutions to individuals. I was in Staple’s Inn when the events chronicled by this video took place.
It is odd to see us sitting at tables and reminds me that the close physical proximity of individuals working on a common cause can give rise to positive results. The positive result in this case is the IFA report that emerged over a year later!
What this is about
We were asked by the IFOA to consider two matters put to us by the actuaries
Rebalancing risks – We think there are opportunities to ease the burden for consumers by shifting the prime responsibility for certain risks back towards institutions. The mechanism for achieving this is structural changes to markets, products/services, and the legal/regulatory frameworks that shape them.
Helping consumers manage financial risk through good decision-making – We believe a key driver for new products and services should be to help consumers with the complex decisions involved in managing financial risks effectively and affordably. This could dramatically improve outcomes for many people, and for society as a whole.
Essentially, the conclusion reached by the IFOA’s working group – following consultation with other actuaries and a few non-actuaries (like me) was that we need to do more on both but that especially , we need to consider where institutions can reasonably take decisions on behalf of individuals to relieve them of a burden everyday people find too hard.
The interim report , published in July next year made the direction of travel clear. The great risk transfer which has created this burden was not (according to actuaries polled) what consumers wanted, so much as what others wanted for them
This is very important. It is often thought that pension freedoms from a move from DB to DC are consumer driven, they aren’t.
Now the working group has published a second report with clear recommendations for action. These go beyond pensions, but as this is a pension blog, I will focus on the pension remedies
This is right and proper. For those who want a default pension, there is CDC, for those who want guidance on options using pension freedoms , there are investment pathways. Both represent a return to risk-sharing , even the decumulation pathways acknowledge that in giving guidance, institutions are taking back some responsibility for outcomes. This is an important point, pathways are a form of insurance against worse outcomes.
A timely publication
I am pleased with the timing of this paper, albeit several months after it was due. The paper reconfirms opinions set out in recent blogs by the FT and others, that pension risks have been transferred in an unwanted way to individuals who are neither ready nor given the equipment to take the decisions required.
This unwanted risk transfer will leave a legacy for the future which is beginning to be recognized as harmful both to individuals and to society.
The document and its predecessors are good reads and deserve to be absorbed into the policy debate, I will continue to contribute my blogs as evidence that the IFOA are on the right track!
All good stuff. Old-fashioned pooling of risks has been atomised in recent years. Cynics might say that given actuaries’ vested interest in pooling, the IFoA would say that, wouldn’t they; but I’m firmly convinced the winds of change are pushing the pendulum back in that direction, with a force that right-wing extremists will be unable to ignore. Apart from the positives, the consequences of failed DIY for levies and PI cover are highlighting the risks to the industry as a whole, as well as to individuals.
The IFoA is determined this report should not become shelfware and will promote these recommendations with determination. They deserve to succeed, because individuation of risk has surely gone too far for a sustainable society.