Opportunities for growth in the retirement market
Dutch Insurance Outlook 2018
There is never a dull moment in the Dutch retirement industry, and several forces are likely to fundamentally change the Dutch retirement landscape in the near future. In this article we explore these forces, the opportunities they pose, and how insurers can capture them.
Changing labour conditions, the abandonment of life-long employment, and flexible labour contracts require different retirement solutions, ideally on an individual basis. Similarly, the ‘silver’ generation, the limited trust in retirement providers, and liberalisation all call for transparency and protection of retirement investments. At the same time, profitability and solvency of the sector is under pressure due to low interest rates, the replacement of Defined Benefit (DB) schemes by (Combined) Defined Contribution ((C)DC) schemes or Premie Pensioen Instellingen (PPIs) and Algemene Pensioenfondsen (APF), as well as liquidation of Ondernemings Pensioen Fondsen (OPFs).
In the midst of all these market forces the government and regulators have been in discussions with the industry and society at large over the last years. These discussions are about designing a new and more individualised retirement structure, which is able to facilitate an ageing population. This provides a certain level of retirement guarantee to employees, and ensure that enough solidarity is enforced to protect those less fortunate in society. The new Dutch government is likely to prepare a legislation that proposes a new and revised retirement system.
Although there is still a lot of uncertainty, the worst conclusion to draw from the above would be to wait and see how these forces in the retirement market play out. In our opinion, the opportunity is here now. We believe there is a limited window—two to three years—of unprecedented opportunities for retirement providers to fundamentally transform to a new, digital, model and by doing so, provide better value propositions to their customers.
Reforming the retirement system: possible scenarios
The political debate on the reformation of the Dutch retirement system focuses on the balance between the collective versus the individual. In the collective setting, risks are shared, solidarity is ensured and, presumably, cost efficiencies are achieved. In the individual setting, transparency to the individual customer is provided, individual choice is respected, and individual portability can be facilitated. In short, a couple of scenarios are available for the politicians to decide on:
1. Optimising the current system. This would most likely imply a further increase in the retirement age (‘AOW’), adopting the calculated interest rate and/or limiting the fiscal accumulation ceiling (2017 figure is €103,317) to €67,000 (third taxation layer) or even €52,000. Other options available for optimising the current system are to increase the freedom of individual choice by, for example, abandoning the maximum 10% high/low limitation in annuities, as has been done in the UK. Another possible option for addressing the structural changes in society is compartmentalising the solidarity in age groups versus the current system—as used by lifecycle funds—of averaging out the ages (‘doorsneesystematiek’).
2. A new pension contract. The new pension contract, known as variant 4C, and as described by the Social Economic Council (SER), is a liberalised pension system with individual accumulation of assets, while risks are shared by the group insured (group risk). The development of the individual retirement assets is dependent on 1) individual premium deposits, 2) return on assets, 3) costs of administration, 4) costs of risk insurance and, 5) the benefits paid out during the decumulation phase. Part of the assets, both in the accumulation and the decumulation phase, are set aside in a group fund to ensure solidarity in risk sharing and to ensure a maximised buffer in times of economic crises. Assets are invested in lifecycle funds. The assets accumulated are not inherited but will, in the variant described by the SER, return to the assets of the group insured. During the decumulation phase of retirement, investments can continue to deliver returns based on the individual risk profile as defined by the retiree.
3. Freedom of choice. A third scenario, although less likely in the short term, given the current feedback of stakeholders, would be freedom of choice regarding retirement savings. It allows the employee to choose his preferred retirement administrator (or stay with the same retirement provider while changing jobs, for example). In this scenario, there is no mandatory retirement saving for all employees of the employer offering the retirement benefit. The employee can opt out and use the sum to his or her own discretion. This can be applied in both the accumulation as well as the decumulation phase.
Scenario B is likely to be more impactful for pension funds than for group life insurers, as the latter are to some extent already able to facilitate a combination of individual assets with group risk-sharing arrangements as part of an insured pension contract. Scenarios A and C, however, are likely to impact the market of group life insurers significantly. Scenario C would effectively level the playing field in the retirement sector although the voluntary consumer participation is likely to lead to a reduction in the number of participants. Premium accumulations will be capped more than current levels and will therefore impact many more employees. A significant portion of future premium volume will evaporate from the books of (traditional) group retirement providers. Deloitte has calculated that the expected asset freefall in scenario A or B is likely to be between €26 billion and €42 billion (premiums and assets). The paradox of course is that, although the fiscal incentive to save for retirement is reduced, the consumers’ need to save for retirement has never been so eminent.
Unprecedented opportunities for Dutch retirement providers
Changes in the (fiscal) legislation of retirement over the last years have already led to a transfer of wealth to the fourth pillar, individual investments without fiscal retirement incentives. Structural future legislative reforms in the Dutch retirement sector will likely increase the importance of this fourth pillar even more, and may even add a fifth dimension (a human capital pillar): ‘working more’. Working beyond the legal age of retirement (full-time or part-time) or working extra hours to accumulate additional retirement savings is already common practice in countries like Japan and the US. It is likely that in the near future, financial advisors will include this fifth dimension as part of their retirement planning advice in the Netherlands too. Flexibility in working arrangements also needs to be facilitated by collective labour agreements and insurers (e.g. through flexibility in the pension plan or additional disability insurance).
In addition, with a rapidly ageing population, a significant inflow of free assets is to be expected of those employees entering the retirement, or decumulation, phase. When the fiscal limitations are loosened for this category (DIP, DIL), entry barriers into the retirement industry will be further reduced, leading to a decline in the premium income of group life insurers. However, for those insurers who have managed to build a relationship and reputation on retirement with their customers, it also provides for an opportunity to help customers manage their wealth and risks while enjoying retirement.
Lastly, there is significant wealth with the elderly population in the Netherlands. Sometimes this wealth is in bank accounts or with wealth managers, and sometimes the value is the house the elderly are living in. As the older generation passes away, wealth is (partially) transferred to the younger generations. This presents a market of wealth transfer and both the elderly and the younger generations will require products and advice on how to best ensure an optimal transition of wealth. Although this is currently the focus of (private) banks, there is potential in this market for insurers who can successfully connect with their customers and extend the relationship beyond the accumulation phase. Especially when considering that new technology, such as robo-advice, extends the affordability of individual advice to mass consumer markets.
Addressing consumer needs in the fourth pillar (and potentially in the abovementioned fifth dimension of ‘working more’), as well as helping customers during the retirement phase, requires a focus on the needs of the individual employee or retiree. Some examples of these needs are:
• Goal-based investing
• Integrated, holistic advice on wealth, health, and risks
• Affordability of advice
• Acting in the best interest of the customer
• Proactively signalling opportunities or risks
Digital technology allows for a cost-efficient way of addressing these needs. So-called ‘robo-advice’ technology has matured to such a level that multiple capabilities can be offered for efficiently addressing the challenges of retirement wealth management. Examples of these robo capabilities or algorithms are:
1. Connecting investors and their accounts
• Account aggregation
• Access to peer information
2. Automated investment engine
• Goal-based investing and planning
• Automated asset allocation and portfolio rebalancing
• Real-time alerts and recommendations
3. Advanced analytics (not fully matured yet)
• Correlating market events with investor actions
• Algorithm-driven guidance to advisors
• Rich client profiles for existing and prospective clients
• Cognitive computing
In Australia and the UK, the transition of the retirement industry has led to the rise of retirement platforms. Combining these insights with the maturing robo-advisory technology is an opportunity for Dutch retirement providers to incorporate this technology as a building block in their digital transformation and provide employees and beneficiaries of retirement solutions with platform-like solutions. At least one Dutch retirement industry participant has already recognised this opportunity. In July 2017, Brand New Day announced the launch of a ‘pension robot’ two years from now, which will define a risk profile, determine the aggregated pension needs, provide an automated advice, monitor the advice, and manage the risks in the portfolio accordingly, during the lifetime of the employee1.
The key to capturing opportunities in the retirement sector
Considering the current market context and the opportunities described above, we see four areas for (group) life insurance companies to pursue a growth strategy in the retirement market:
1. Focus on addressing unmet needs of specific segments. The owner-director (DGA) of an organisation is, as of April 2017, no longer able to accumulate retirement wealth on his/her own company balance (‘DGA in eigen beheer’). Therefore, the DGA is required to look for other solutions to save for his financial future and manage the risks accordingly. Similarly, independent contractors form a segment with limited fiscal incentives to save for retirement, but still have a need to achieve financial security, also after their retirement.
2. Develop digital interfaces and workplace solutions to help individual employees gain a better understanding of their retirement savings and help them manage their financial future. Most ‘MyRetirementSavings’ portals in the Netherlands are poorly visited by employees. This is because they offer limited added value, are not integrated with other means of communication and do not offer proactive notifications. Leveraging robo-advice technology allows for holistic financial planning and proactive alerts. Digital interfaces can be purely informative or they can be built to also provide advice.
3. Develop holistic and flexible retirement propositions which allow for part-time work, combine total wealth, and guide employees from the accumulation to, and through, the retirement phase of decumulation. Ultimately customers are not merely looking for a pot of money when they retire. People want to enjoy retirement, which implies having sufficient money, living well and being healthy.
4. Leverage the Dutch capabilities and increase scale by expanding internationally. The PPI can be leveraged to also administer retirement plans in other countries. The Pan EU Personal Pension (PEPP) can also accommodate cross-border activities. This will increase the scale of operations and drive costs down—provided processes are digitised. Other capabilities related to retirement wealth management, such retirement advice platforms or risk solutions, can also potentially be offered in other markets.
Finally, to capture the opportunity and manage the transformation of (group) life insurers we have a number of recommendations:
- Automate as much as possible. Digitised processes will facilitate compliance procedures, drive down costs and provide an opportunity for addressing individual needs.
- Work with personal advisors, not against them. Globally, there are only a few examples of successful ‘digital only’ platforms. We see a continued need for personal advice, particularly in the retirement industry. However, in combination with digital tooling, the advice can be richer, more tailored to the best interests of the client and can be delivered more efficiently.
- Design for a new generation of investors. Generations X or Y have different expectations of insurers and retirement providers. Digital communication, overviews, and insights are must-haves, not special features.
- It’s about life, not money. Focus on helping customers navigate through life. Money is a means to live life. When reframing the paradigm from ‘retirement capital’ to ‘enjoying retirement’ it opens new opportunities for innovation.
- Experiment and scale quickly. Learn using prototypes and fail fast. However, when identifying the smallest success, scale up quickly. Research by Deloitte and MIT Sloan2. indicated that compared to other countries, Dutch companies are better in experimenting and innovation but lag behind in scaling successes up quickly.
- Be aware of the competition. Banks, fintech companies, and technology giants such as Facebook and Google are also eyeing possibilities in the retirement market. Insurers should leverage the advantages they have (existing client relationships, knowledge of the market, valuation and pricing expertise) and make the first move.