In the next few years, global retirement systems are set to come up against some significant challenges, likened by the World Economic Forum (WEF) to ‘the financial equivalent of climate change’. Indeed, as life expectancies rise and birth rates decline, limited access to pensions, coupled with inadequate financial literacy have left individuals ill-prepared for retirement. The WEF says the global pension gap, anticipated to grow by 5% annually, is projected to reach an astronomical US$400 trillion by 2050. Within the UK, the WEF estimates a staggering escalation of the pension savings gap from £6 trillion to £25 trillion by 2050.
In the UK, for example, the government is trying to mitigate this gap - with the retirement age due to rise to 68 in 2039 - by increasing participation levels in auto-enrollment schemes. But this alone is not enough. In fact, the Institute for Fiscal Studies (IFS) says almost a fifth of working-age private sector employees (around 3.5 million people) do not save into their pension each year. This is particularly true of low earners who are below the threshold for automatic enrolment. Perhaps more concerning, is that most of those participating in a pension save low amounts. 61% of the middle-earning private sector employees who are contributing to a pension are saving less than 8% of their earnings, and 87% are saving less than the 15% which would be more in line with what Lord Turner’s Pensions Commission thought appropriate.
“Wealth managers are uniquely positioned to not only support their clients but also ensure a robust plan is in place. Plans are not static destinations; they are dynamic routes that may encounter obstacles.” Christopher Baxter, Senior Solutions Consultant, aixigo
Research from the Phoenix Insights Longer Lives Index data suggests that only 14% of those who are saving are on track for the retirement that they want, and 33% of those who think they are on track will face a shortfall of £100,000. This shows that there is a lack of transparency, even for those who are saving for retirement, meaning many are at risk of not saving adequately for the future despite believing this to be the case.
Therefore, we find ourselves in a situation where the majority of consumers are either not saving enough for their retirement or, in the worst case, not saving at all. Furthermore, many parents have further goals for their money in retirement. They want to support their children whether that be with the ever increasing costs of further education or property, but the costs of retirement itself are making this increasingly difficult.
Supporting clients
So how can wealth managers support their clients and, indeed, help them thrive? Providing a service that not only addresses but also anticipates these challenges, cultivating loyalty among clients and creating avenues for cross-selling opportunities. Drawing on our market experience, we delineate key focal points for wealth managers confronting the pensions gap.
Holistic planning
Across Europe, there is a discernible shift away from conventional investment advice. The emphasis now extends beyond mere financial investments to encompass the client's entire life and financial aspirations. In Germany, for instance, research from the Association of German Banks reveals that 45% of respondents fear a financially precarious retirement, with 64% expecting a significant decline in available funds. Clients seek more than investment advice; they crave answers to pivotal life questions such as, ‘When can I retire?’, or ‘How much must I save for a comfortable retirement?’
The right tools for the job
Wealth managers need to support their clients in making informed decisions about their finances with a view to the future. The pension forecast of their clients needs to be regularly reviewed to make sure they are on track to reach their goals. In this way, if there is for example a shortfall it can be detected quickly and will give the wealth manager time to make changes to the client’s financial plan. But in order to do this, wealth managers need to be kitted out with the right tools.
Indeed, retirement planning is complex, as shown by the IFS, those retiring with defined contribution pension pots face considerable difficulty and risk in managing their finances through retirement. The rising prevalence of defined contribution pensions, combined with pension freedoms, means that many will be able to draw their pension flexibly through their retirement. But decisions around how to draw down pension wealth are high-stakes and will need to be made with care. Current IFS models show that a man aged 66 is expected to live for a further 19 years, but 13% can expect to survive until age 95; while 66-year-old women are expected to live for a further 21 years with 20% making it to age 95. There are risks of running out of private resources or of being so cautious as to end up suffering a needlessly austere retirement.
A tool to support wealth managers is cashflow planning, which can simulate a client’s life, helping the client and the wealth manager make informed decisions. Yet cashflow alone is not enough, a lot of planning tools currently create a plan which is a snapshot of that moment in time. These tools need to be coupled with monitoring solutions to make sure a client is on track to reach their goals. Whether these are to have enough money to enjoy retirement comfortably or further goals, such as supporting their children to get onto the property ladder. If such a goal is at risk, the adviser can step in and see what can be done to alleviate the problem.
Advice-as-a-Service
Thus, wealth managers need to look towards an Advice-as-aService (AaaS) model. A model in which a client has an annual review no longer works, but a system which is constantly monitoring their position and alerts them when there is a need for action, would give the client peace of mind that if something needs addressing it can be looked at right away, as opposed to waiting for their next annual review.
The pension gap is an enduring challenge set to intensify, but wealth managers are uniquely positioned to not only support their clients but also ensure a robust plan is in place. Plans are not static destinations; they are dynamic routes that may encounter obstacles. Armed with the right tools, wealth managers can navigate these challenges, making informed decisions to alter course and ensure the journey culminates in the desired destination.
Interested in reading the full report? You can read this edition of the WealthTech 2024 Annual Report online here.
