The Institute and Faculty of Actuaries (IFoA) has today published practical solutions for how individuals can take greater control of their finances following its Great Risk Transfer campaign.
Launched in January 2020, the campaign was set up to investigate how risks are increasingly being transferred from institutions to individuals, such as responsibility for pension saving and social care funding.
These financial choices can be extremely complex, and can often be detrimental to individuals, as has been seen with the extensive mis-selling of Payment Protection Insurance (PPI).
In a new report, the IFoA recommends how policymakers, employers and the financial services industry can rebalance risks by shifting some key responsibilities back towards institutions, and by helping consumers with financial decision making.
Immediate past president, John Taylor, said: “Transfer of risk to individuals has been driven by governments and companies seeking to reduce their risks. While this may be a rational strategy for these institutions, it has had damaging impacts for consumers and society as a whole.
“In terms of harm to individuals and damage to public trust in institutions, we believe risk transfer represents an even wider systemic failure than well-known examples such as the widespread mis-selling of PPI.
“Our report calls for urgent action to tackle risk transfer as a systemic failure, and recommends some practical solutions.”
For rebalancing risks, the report recommends:
- Government action to show employers that collective defined contribution (CDC) pension schemes are an attractive alternative to defined contribution (DC) schemes
- Government consider extending default pathways for drawing on retirement savings to all retirees, to reduce the risk of individuals running out of money during retirement
- Government, industry and the IFoA determine a minimum level of insurance protection needed for all
- The IFoA promote research into factors that make a model such as Flood Re successful, and how such models might be applied to other risks to improve access to affordable insurance for all consumers
- The Pension Regulator’s defined benefit (DB) funding Code of Practice make avoiding scheme closures an equal priority with member security
- HM Treasury consider whether changes to the Solvency II framework in the UK could incentivise insurers to develop products that offer consumers investment guarantees.
As for helping consumers with decision making, the report recommends that:
- The Financial Conduct Authority (FCA) set an ambitious target to increase individual take-up of Pension Wise appointments before accessing pensions
- The Money and Pensions Service Dashboard Steering Group prioritise the way retirement income is estimated and presented in a consistent way
- The FCA put in place regulation or guidance to strengthen consumer protection in risk transfer incentive exercises
- Government reinvigorate its public messaging around minimum pension savings levels, in particular auto enrolment.
“Our work suggests that greater choice and access to pensions and insurance products is possible and desirable,” Taylor continued. “We believe there are opportunities to rebalance risk away from consumers back to institutions in a way that is likely to benefit society as a whole in the long run.”
Join the IFoA and the think tank Demos for an online panel discussion on 22 April 2021 to mark the launch of the Great Risk Transfer campaign’s recommendations by registering here