A customer-centric vision for the income-planning domain
by Martin Bradley and Adam S. BerkMr. Bradley and Mr. Berk are member s of EY’s Global Pensions Leadership Team. To learn more, please contact [email protected] or [email protected]
Pressure is mounting to develop more robust long-term pension and retirement distribution strategies. As focus shifts from product to individual customers planning for their retirement and from defined benefits to defined contributions, attitudes and policies need to change.
It is time for life insurers, asset managers and other stakeholders to step up to the challenge of improving pension and retirement systems.
No Simple Answers
A new report by EY, The $500 trillion prize: A customer-centric vision for the global pension and retirement market, underscores the need for collaboration on the journey ahead. It is based on insights from governments, policymakers, pension industry executives, regulators and corporate employers in 21 countries. Views differ widely on what it takes to build greater public confidence and unlock opportunities for better retirement outcomes.
The title for this report is based on an assumption that the average person needs at least $100,000 in retirement savings. Yet, the current size of the retirement asset pool is less than $100 trillion. For this survey, we assumed a five-fold increase and projected that the total pool of retirement assets will approach $500 trillion over the next decade.
There are endless debates on how to achieve this goal. Policy reform is never easy. Yet, many stakeholders across the board are working to improve investor education, product selection, efficiency and governance. Findings in the EY report show the balance of power is moving toward a new world of pension and retirement choices. Customers want products and services that are more transparent and easier to understand. They are also demanding more from their financial advisors. A customer-centric model is emerging where policyholders need support to make well-informed decisions about their retirement security.
Is the Industry Prepared?
Managing this transformation will require policy and industry change. Not everyone is adequately prepared. Another factor is the government’s role in long-term social, pension and retirement liabilities. The upside: the government sets the parameters for the $500 trillion prize. The downside: in many countries different levels and structures of government will likely be underwriters of last resort for pension and retirement gaps.
Supporting Well-being and Retirement Outcomes
Top-line growth opportunities come at the price of transformational change. As pension and retirement converges with wealth management, there are significant opportunities to enhance retirement outcomes. These must align with fiduciary responsibilities. Successful delivery and distribution of social, pension and retirement policy and solutions will require focusing on the following key areas:
- Strategy and long-term vision
- Empowering better decisions
- Improving the customer experience through delivery
- Deliver well-being through products
- Accelerate digital maturity to support informed choices
Strategy and Long-term Vision
Vision, strategy and role clarity are the foundation of public confidence, the report finds. Yet, one in three survey respondents lack a clearly defined long-term strategy – and want more clarity and alignment of interests. Defining and articulating purpose and long-term vision is crucial. Private sector providers must maximize short-term business strategies and optimize shareholder value.
- Leading public and private sector pension and retirement providers face these strategic fairness and equity issues:
- Who should pay for efforts to invest in the “right” solutions?
- Who underwrites the risks of member financial well-being and retirement outcomes?
- How much do people need to address their basic needs?
- Who determines the magic number?
- Who measures and tracks progress?
- Empowering Better Decisions
Paternalism has dominated pension and retirement solutions for years. Governments and employers traditionally paid contributions and carried the risks. This limited the perceived need for informed decisions by individual customers. The shift from defined benefits to defined contributions is changing the landscape. Customers and employers now have more decision points, though the report shows that many lack the necessary information to make informed choices.
Corporate employers appear to be ahead of other stakeholders in communicating and delivering financial advice to plan participants. The survey shows that 75% have the capabilities in place; yet only 25% rate themselves as global leaders. Fifty-five percent of product providers say they deliver timely and adequate information. Empowering members to take control of decisions is still a long way off for most providers.
Delivery is an Overarching Issue
The transition from product centric to customer-led decisions is accelerating. It is time to truly listen to the voice of the customer.
Improving the customer experience is essential for all private and public sector pension and retirement plans. Yet, most global participants cite substantial gaps in being easy to deal with. Only 3% of the surveyed corporate employers, product providers, public sector retirement plans and government policymakers/regulators say they have “leading” capabilities in this area. Clearly, there is a correlation between engagement, successful implementation of choices and approval of reforms. The digital era is enabling more members and employers to express their views. This, in turn, will challenge public confidence.
Few stakeholders acknowledge that the historically low strategic importance of administration and delivery on a policy and provider level has restricted success. Some participants question whether policymakers and pension and retirement plan providers need to elevate the importance of administration and being easy to deal with? Answers can be found in customer journey maps and strategic core policies could provide answers.
Products Must Ultimately Deliver Well-being
Do we really understand what customers need? Most providers believe they deliver exceptional customer service, but only a few customers agree. More than half of stakeholder groups acknowledge the need to significantly change current pension and retirement solutions and their relevance. Regulation and political debates that jeopardize reforms are common barriers.
The shift to customer centricity for empowerment and advice reveals an unsettling truth: members seek financial well-being as a goal during their lifetime. They prioritize not merely on monthly payments in retirement, but also broader issues such as beneficiary protection, health care and planning for terminal illness. Many customers see social security, pension and retirement solutions as useful tools to achieve the overarching goal of lifetime financial well-being.
Accelerate Digital Maturity to Support Informed Choices
Innovative digital solutions are slowly reshaping the pension and retirement industry. They are affecting long-term retirement outcomes and reducing the cost to engage, advise, serve, comply and invest.
Overall, digital maturity is low in the pension and retirement market. Many recognize that more needs to be done to maximize the benefits and minimize the digital risks. Self-assessment responses vary on a global basis. Half of corporate employers give themselves low maturity scores. Likewise, 54% of governments, policymakers and regulators acknowledge the fundamental need for digital platforms and its potential benefits.
Maturity benchmarks range from social media involvement to long-term disruptive digital strategy and the use of big data and digital marketing. Many participants raise concerns that policy and regulation substantially restrict their ability to maximize benefits from digital capabilities.
Difficult Decisions Lie Ahead
Pension and retirement assets are expected to grow dramatically over the next decade as stakeholders prepare for the global demographic transformation. As the private sector looks to manage $500 trillion in investments, it has the experience and infrastructure to address distribution challenges. This comes at the price of adhering to more regulation and ensuring adequate levels of fiduciary responsibility and consumer protection.
Building a better retirement world will require adapting to a new culture and a customer-centric model where policyholders and beneficiaries make well-informed decisions about their financial well-being in retirement. All stakeholders will need to collaborate more closely if they are to attain the $500 trillion prize and improve customers’ financial well-being in retirement. ◊