The Great Risk Transfer – looking to the future
Imagine a world in which there was nothing to prompt the IFoA to initiate our ‘Great Risk Transfer’ campaign. This is not a Utopian John Lennon ‘Imagine’ – much more modest than that. But let’s dip a toe into this imaginary world (at an unknown date in the fairly near future) – what might it look like?
A few years ago, Alex’s employer, persuaded by Government incentives and decisions made by several firms in its sector, chose to create a Collective Defined Contribution (CDC) pension scheme. Alex welcomed this move. He had been concerned about how he was going to make good financial choices at retirement, without being able to afford personal advice. Few retirees were still converting their DC pension pots into an annuity after the Government’s ‘Pensions Freedoms’ allowed for other choices; and yet the alternative seemed to carry serious risks – either running out of money too soon, or leaving funds unspent if he didn’t live as long as expected. Alex welcomed the prospect of a decent and stable income in retirement, even if the increases couldn’t be guaranteed.
Alex is now nearing retirement. Although he’s not really engaged with the fine details of pensions policy, he feels confident about his future security. This is not only because of his CDC pension but also because of other services that have been very widely promoted. He knows, for example, that he can benefit from Pension Wise advice – although take-up was disappointing in its early years, most people now use the service and appreciate its quality. He knows also that the Government and pension schemes like his have defined a set of ‘pathways’ for drawing down pension pots that suit various groups of retirees. His Pension Wise adviser will help him identify which pathway is closest to his needs, and if none are, ways to find a more tailored answer.
All in all then, Alex feels that he can look forward to an adequate and sustainable income in retirement. But he also feels reasonably comfortable about his resilience to most financial shocks that could affect him. A few years back, he bought a house in an area with a history of serious flooding. Not the perfect location, but he needed to be close to his elderly parents, who had lived there all their lives. Fortunately, he was able to buy affordable home insurance because the area was covered by the Government’s FloodRe scheme.
Alex’s home cover also benefitted from a similar insurance model applied to another context entirely. A spike in crime rates close to his property would have made premiums unaffordable, but a reinsurance scheme (Burgla-Re) had pooled the risks that individual insurers were exposed to, allowing them to charge affordable rates. Though Alex didn’t know it, one reason why the scheme came about was that, some years back, the IFoA had commissioned research into areas of insurance where some people can’t afford cover for reasons outside their control – such as where they live, or pre-existing medical conditions. The research studied why FloodRe was successful, and the potential to extend this approach to other examples, including crime rates. The research findings had helped to prompt a wider initiative by the Government to define and implement minimum insurance cover for all, including low-income families.
We have been actively pursuing all of these goals and more since the Great Risk Transfer report was published. The effort goes well beyond the Policy team or even the IFoA’s gifted and enthusiastic volunteers, and also includes partner organisations such as Fair by Design and the David Hume Institute, and engagement with politicians and other influential leaders.
Right now, Alex is just embarking on his career. Our vision in the Great Risk Transfer campaign is that, as he approaches retirement and beyond, he will have a smaller number of financial risks to manage, and he will receive the advice and support he needs to manage them.