SPENDING IT DOWN
Given these historically low bond yields, insurance companies are no longer able to provide the guarantees of the past, which is one of the fundamental strengths of their business. At the same time, asset management companies, whose main model was to keep assets invested in capital markets without providing any guarantees, have begun to explore products that actually have guarantee-like aspects.
What is taking place is a situation where both industries are blurring around the edges and their products are taking on characteristics of the other. This is an innovative development because increasingly solutions will be needed that will generate investment returns in retirement while enabling individuals to draw down their assets. The situation stems from reforms governments worldwide have undertaken that will leave future retirees with less social security income compared with today’s pensioners.
These changes were initiated because swelling numbers of increasingly long-living retirees and declining numbers of workers means pension provision is becoming a delicate balancing act between caring for one generation – who have worked and contributed to the existing system – and ensuring the rights of future generations.
But while changes may keep pension systems sustainable, people today need to consider if they will have adequate retirement income to maintain their standard of living when they retire. Or will they risk an income shortfall, or even poverty? Renate Finke investigates this with the new Retirement Income Adequacy (RIA) Indicator, which compares the adequacy of retirement systems between countries. She notes that future retirees who expect to depend significantly on social security should consider that only Finland, New Zealand, the Netherlands and Norway have public systems that seem to both provide adequate retirement income and to be sustainable.
Read more about the challenges for the financial industry in part two of “Happy Feat”