IFoA report calls for ‘bottom-up’ approach to assessing adequacy of retirement income

Industry experts and policy makers today (11 July) discussed alternative approaches for assessing adequacy of retirement income at a round table event organised by The Institute and Faculty of Actuaries (IFoA), to coincide with the launch of its new report "Assessing adequacy of retirement income: a bottom-up approach."

• focus should be on retirement income goals rather than proportion of earnings contributed
• tailored communications plans targeted at individual needs would be more successful than one-size-fits-all approach
• creating a simple rating system could help savers better understand how to reach their retirement goals.

At the meeting the IFoA called for a ‘bottom-up approach’ to saving, where the focus shifts to retirement income goals rather than proportion of working life earnings contributed, in order to increase engagement with savers and help them turn their savings into an adequate retirement income that would last their lifetime.

The IFoA has identified four areas where adopting a bottom-up approach could improve the likelihood of savers achieving adequate retirement income:

• shift the focus to outcomes and income needs as opposed to saving requirements
• develop an effective communication strategy across regulators, Government and industry that is tailored to individual needs rather than a one-size-fits-all approach
• create and maintain tools that help savers assess the adequacy of their savings and plan for their retirement
• create in-retirement default vehicles that combine flexibility with an element of guarantee.

The IFoA suggests introducing a simple rating system to help savers understand how close they are to reaching their retirement income goals:

• bronze rating shows individuals could meet all necessary outgoings with no non-essential spending
• silver and Gold ratings show individuals who will have enough savings to give them some financial resilience against unforeseen costs such as household repairs or long term care needs, and those individuals who have sufficient saving to afford additional non-essential items, such as being able to travel or leave a bequest
• showing the tangible benefits of saving may help people to gain a better understanding of how the amount they save today will affect their lifestyle in retirement, and therefore, encourage people to take greater control so that they can meet their needs for the duration of their lifetime.

Gareth Connolly, Chair of the IFoA Pensions Board, comments,

“It is crucial that people are able to plan properly for their retirement and understand what steps need to be taken to ensure an adequate retirement for their individual needs.  We hope that this report will go some way to assisting Government, regulators and industry in putting together a communications and planning framework that works for savers so they can plan adequately for their own retirement goals. 

“Taking an outcomes based, or ‘bottom up’ approach to retirement saving should help savers understand how close they are to reaching their goals, and what steps they would need to take to ensure an adequate retirement income if they are falling short of their goals.  Additionally, the risk of running out of money in retirement should be mitigated as much as possible to protect people from hardship or needing to fall back on the State for support.”

Read the full "Assessing adequacy of retirement income: a bottom-up approach."

~ENDS~

Editorial notes:

About the Institute and Faculty of Actuaries

The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body.

Research undertaken by the IFoA is not commercial.  As a learned society, research helps us to fulfil our royal charter requirements to further actuarial science and serve the public interest. 

Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.

Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.

Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.

The IFoA is available to provide independent expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.