Dick Kamp: Why are we switching to the Wtp again?
This column was originally written in Dutch. This is an English translation.
By Dick Kamp, Director of Pension, Investment & Risk at Milliman Pension
In discussions about the transition to the Wtp, I often notice a lack of attention to the future prospects that await us. Our society requires ongoing maintenance, whether it concerns roads, education or institutions. We are changing and our environment is changing with us. We must anticipate this and continue to adapt.
After nearly 75 years, our pension system is in need of maintenance. The financial markets have changed, the composition of our population has changed, and after the crisis of 2008, we as a sector concluded that things could not continue as they were. Supported by scientists and economists, we as a sector developed the pension system into what is now known as the Wtp.
And even now, the demands that people place on pensions are changing. The direction these changes will take in the future is still unknown. The pension system must be adapted accordingly.
The ‘collective individual system’ we are now moving towards is a crucial first step. It remains collective in order to maintain cost advantages and important elements of solidarity. And it is individual in order to enable participant empowerment.
Why participant empowerment? Our society is (fortunately) highly differentiated, well educated and people are largely geared towards making their own choices. A collective straitjacket is not appropriate in this context. In addition, the pension people accrue is usually the most valuable asset they will ever own, apart from their own home, and they will soon have annual insight into this. The period between accrual and withdrawal can be as long as 50 years. A lot can happen in that time. At present, pension savers have no say in the matter. It is virtually impossible to make your own investment choices.
Do people really need that? Surely they are not thinking about retirement? Don't they have enough insight? And isn't it too complex? All of this is probably true. But that applies mainly to the current generation. And pensions do not fit well into financial planning in the period before retirement. And there are currently few or no options or incentives to arrange things differently (fiscally or legally). People only take action when there is something to choose from or when there are incentives from the government. In other words, when they are empowered. I am convinced that the latent demand is there, but that it needs to be realised through opportunities, information provision, more and better incentives, etc.
What should we have in mind? When it comes to innovation, we need to focus on involving participants through education and training, with transparent communication using user-friendly technology, including personalised financial advice. On the other hand, schemes are being developed, with early involvement of participants through workshops, surveys and the like, that offer flexibility so that participants can adapt their pension planning to changing life circumstances, such as changes in their career or personal life situations. Think, for example, of being able to borrow from one's own personal pension pot to buy a home or to enable a year of retraining. Active participation of participants in product development, but also the use of systems to obtain continuous feedback from participants, is therefore important. This will take us from ‘participant empowerment’ to ‘participant-inclusive pension schemes’.
In short, there is still much to innovate and develop. This is characterised by having an individual pot and more up-to-date insight into it, with prospects for action. What we really need to worry about now, apart from the one-off fair allocation of collective assets to individual pension capital, is that we are already putting in place a governance, knowledge and IT infrastructure that promotes innovation and provides prospects for action for participants.
We must, of course, conduct the current discussions properly. Not with the idea that everything was better in the past. That was certainly not the case. We as a sector have initiated this step ourselves and must also complete it. But we must do so with a view to further innovation. The basic prerequisite, individual pension capital with up-to-date insight, is in place. Now we must move on to further development and the creation of incentives from the government. Driven and facilitated by a governance and technological infrastructure that now needs to be worked on in earnest. It is essential to offer participants a clear perspective on how to proceed in good time.
Dear board member, how will you stimulate innovation? Are you up to the challenge?
This is the thirty-ninth column in a series on risk management. The series aims to encourage readers to consider risk management as an integral part of running a pension fund.
