Mega trend 5: Longevity risk will (is already) moving back to institutions from individuals

For as long as I’ve been working in the retirement space, headline attention has been focused on the move from defined benefit pension plans to defined contribution style arrangements and on the clawbacks applied to social security systems – along with personal savings, these are the three legs of the traditional retirement savings stool. This move creates greater choice and flexibility for the individual, while at the same time increases their responsibilities for managing future financial risks.

This shift of risk from institutions to individuals has led to less certainty in the level of assets available at retirement and less certainty in how long those assets will last through retirement. The retirement stool is starting to look very unstable, so my prediction is we will begin to see a reversal of this trend. 


Where are we now?

A 2019 paper on the American retirement system presented by the National Institute on Retirement Security reports the following sobering statistics.

  • Many Americans are without retirement savings, and those who have them have less than $50,000.
  • A staggering 77 percent of Americans won’t meet retirement savings targets, even if they are willing and able to work until age 67.

In addition, where defined benefit plans were the most common form of retirement benefit in the 1980s, now, only 17% of private sector workers claim access to one.

Managing risk as an individual is hard

For those individuals who do manage to make it to retirement with a reasonable savings balance, managing those savings on their own can be challenging. Many people will be familiar with how difficult it is to predict volatile financial markets, particularly in periods of uncertainty such as the recent COVID-19 pandemic.

It’s just as hard to predict our individual lifetimes. According to the Stanford Center on Longevity, the majority of people underestimate their life expectancy in retirement. And even if they know their life expectancy, there is still over a 50% chance they will live even longer. We only become more confident in managing this risk the more we can mask those individual fluctuations by looking at suitably large populations.

The American public agrees. The table below reports the key struggles Americans face as they look to prepare for the retirement my generation saw advertised in the Freedom55 ads. The bottom four relate directly to the issues discussed above.


To what extent are the following making it harder to save to retirement?

The rising cost of healthcare in retirement

74%

The rising cost of long term care

66%

Salary stagnation

61%

Increasing debt load

57%

Uncertain expected lifetime

57%

Fewer employer sponsored pensions

56%

Reliance on individuals to save

51%

Market volatility

37%

Source: National Institute on Retirement Security Retirement Insecurity 2019: Americans' Views of the Retirement Crisis


Americans believe that employers need to contribute more to retirement security. And more people than I thought – nearly half – seem to be willing to invest at least part of their retirement wealth in some form of guaranteed income.

What does the future hold?

Luckily the wheels of the global innovation engine are spinning to meet this growing commercial and social challenge, marrying the concepts of flexibility and control over one’s assets with a component of guaranteed income for life.

Looking to the insurance market first: while single premium annuities have long been available at retirement, a new breed allows the deferral of income to much later in retirement. This structure provides both flexibility and the ability to participate in the market much longer than traditionally available. Once their expected lifetime is reached, and the retiree starts to win the longevity lottery, these products allow for guaranteed income for the remaining duration of their uncertain lifetime.

Asset managers are also taking a hand at addressing this growing need by reviving the concept of the tontine structure, in partnership with the regulatory community. Tontines pool the investments of a large cohort of people, deploying institutional investing, and pay dividends based on the mortality experience of the group to protect those who live the longest out of their peer groups in the later years of their life.

Governments are similarly stepping in: one example from the UK are  Collective Defined Contribution (CDC) plans. Regulation has been introduced to allow the pooling of individual employee retirement accounts into a special master trust, which provides both cost certainty for the employer through fixed contributions, and more reliable income for the annuitants as they pool their longevity outcomes.

These developments, while still in their exploratory phases, represent an important reversal from the transfer of risk management to the individual (which isn’t really risk management at all) to allowing the pooling of risk by institutions which are better able – through their size, expertise, and negotiating power – to manage the risk efficiently.

At Club Vita, we’re working to support efforts in our local markets and with our clients as we work towards a more efficient and effective risk transfer market that benefits us all.

What do you think?

Will individuals embrace the new products coming to market and better manage their longevity risk in retirement?

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