Since the start of 2020, the IFoA’s Great Risk Transfer campaign has been exploring a trend to transfer risks from institutions – such as employers, the state, and financial services providers – to individuals, who are often not well-placed to manage them.
Our Interim Report highlighted evidence of this shift in areas including pensions, insurance, and employment.
Our campaign to date has demonstrated that influential figures in finance, politics, academia, and elsewhere recognise the Great Risk Transfer as a pressing and important issue. We continue to seek opportunities to influence or work with others to implement our recommendations.
We think there are opportunities to shift the prime responsibility for certain risks back towards institutions, easing consumers’ share of the burden in managing those risks. Our recommendations focus specifically on pensions and insurance, in which actuaries’ skills and experience enable them to contribute to solutions. The pensions recommendations include the development of Collective Defined Contribution schemes and investment pathways for drawing down pension pots. In insurance, we propose defining a minimum level of insurance protection needed by all, and regulation that encourages insurers to offer products with investment guarantees.
In the UK, many individuals’ employers no longer provide access to defined benefit pensions. Although Defined Contribution (DC) pensions might be a suitable alternative for many individuals, in their current form they would not meet well the needs of those who want a regular retirement income for the whole of life, but do not want to meet the expense of an insured annuity.
CDC is a new type of pension scheme into which employers and employees pay a fixed rate of contributions, and members are paid pensions with variable increases (and possible, but rare decreases). These are risk-sharing (or target pension) plans widely used in several other countries including Canada and Holland. The Pension Schemes Act 2021 provided the primary legislative framework for CDC schemes in the UK.
Regulations laid before Parliament in December 2021 have provided the foundation for CDC schemes to be introduced in Great Britain. In the coming months, attention will turn to the possibility of establishing multi-employer CDC schemes amongst other variations.
Good pension provision represents a puzzle about how to provide an income that cost-effectively meets an individual’s needs in retirement when those needs and the individual’s lifespan are unknown in advance. Solutions are different for different groups of individuals in the UK, depending on matters such as their other sources of income, their types of expenses, and their appetite for managing their own retirement savings. The IFoA’s view is that better options could be made available for some groups. We are open-minded about the possibilities and have recently been investigating CDC pensions as a possible solution.
Recent developments in the UK pension system have forced individuals to take increasing responsibility for their retirement savings. However, eight in 10 people with a defined contribution (DC) pension have not given much thought to how much they should be paying into it to maintain a reasonable standard of living when they retire. Pensions dashboards hope to enable individuals to access information online, securely and all in one place, about their multiple pension savings, including State Pension. This will support better planning for retirement and growing financial wellbeing. Dashboards will also help people to reconnect with any lost pension pots.
The Money and Pensions Service (MaPS) established the Pensions Dashboards Programme (PDP) to develop the governance framework and infrastructure that will make pensions dashboards work. Read the PDP’s progress reports.
The IFoA welcomes any tools such as pensions dashboards that help individuals better understand their pension savings. However, dashboards should be seen as the first step towards communication that aids financial education and truly engages savers with retirement planning. Dashboards alone will not achieve this aim, and we believe significantly more promotion by the government, employers, and pension providers is needed. Society has much to gain from an improved savings culture, and the government should play a central role in making this happen.
Consistency will be key to making the dashboard a success – in how data is collected and presented, between different types of DB, DC, CDC, insured arrangements, and state pensions. What appears on the dashboard must also be consistent with other pensions communication from trustees, providers, and advisors.
You can read more about the IFoA’s position on pensions dashboards.
As the population grows and individuals live longer, more and more people require long-term care in later life. The Care Act 2014 embodies the most recent attempt to reform the social care system in England. But despite making its way onto the statute book, the reforms were subsequently delayed in 2016. They have since been shelved in favour of new legislative proposals.
With a complex funding system continuously under government review, many individuals find it difficult to understand the potential social care costs they will be expected to meet later in life. As a result, those individuals are not sufficiently prepared.
Furthermore, there is a hidden cross-subsidy in the care sector, in that privately funded provision subsidises under-payment from social service departments. In turn, it also drives down wage levels in the sector to unsustainable levels. That means care homes often find it difficult to meet staffing levels required to provide adequate care. The entire sector urgently needs more funding. Long-term sustainable cross-party political agreement is necessary, however hard it is to achieve.
With the NHS under increasing budgetary strain, the government must set out a clear strategy for tackling social care in both the short and the long term.
Should the government revisit plans to introduce a lifetime cap on care costs for adults in England, it should reconsider the proposed £86,000 cap. A significant proportion of people who pay for their own care in England won’t benefit from a cap at this level.
Pensions Policy Institute analysis shows that the people most likely to benefit from a social care cap have the highest levels of income and assets in the population. Government funds are under significant strain. So, would it be more appropriate to encourage people with the means to pay to take out insurance against the risk, rather than the state stepping in?
The government should introduce a more generous means test. This would widen access to the state-funded system of care and support for pensioner households with modest assets and wealth.
Under the most recent planned care reforms the upper threshold means-test limit was expected to increase from £23,250 to £100,000.
It is unlikely that there will be a universal ‘silver bullet’ product solution. However, there are a range of insurance and savings-based financial products already on the market that could be suitable for parts of the working population. Suitability depends on factors like their wealth, assets, risk appetite, and health. These products include INAs, life insurance-style care riders, pensions, and equity release.