By Yvonne Sonsino, Partner, Innovation Leader, Mercer and Andre Belelieu, Head of Insurance and Asset Management, World Economic Forum
This article was first published in the World Economic Forum Agenda on August 3, 2020.
- To redesign a retirement that builds the necessary financial resilience for longer lives, the World Economic Forum and Mercer have created a ten-point checklist to redesign retirement.
- Safeguarding financial wellness requires an all-encompassing view of a person. This means considering their tangible assets (including savings and property), but also less tangible assets such as health, skills and career readiness to work longer.
- It will also require coordinated efforts across stakeholder groups, including individuals, employers, financial services providers and governments.
Much still divides us: race, gender, ability, education, income, politics; even disease can choose its primary victims as COVID-19 has shown. But there is still one thing that unites us: ageing. The world’s collective age is rising at an unprecedented pace. Advances in healthcare have contributed to longevity – so much so that we are already talking about the 100-year life. But as much as we should celebrate this increased longevity, one important gap remains: how will the 100-year life be a financially secure one.
Even before COVID-19, the way in which societies and individuals prepared for retirement was not designed for our current demographic reality. On average, individuals are outliving their money by between eight and 20 years; women in particular are at the sharp end of this scale, with longer lives and pension savings around 40% lower than men’s.
Public coffers are under strain, causing unprecedented challenges to government pension schemes. This has been reflected in Aegon’s Annual Retirement Readiness Index (ARRI), which studies global attitudes and behaviours related to retirement planning and ranks retirement readiness across countries on a scale from 0 to 10.
Since 2012, the ARRI’s global average has fluctuated between a score of 4.9 and 6.0, indicating a low level of readiness. In 2020, nine of the 15 countries surveyed scored 6.0 or below, and none scored above 8.0 (indicating a high-level of readiness).
Image: Aegon Retirement Readiness Index (ARRI) 2020
The pandemic is only exacerbating these trends, battering jobs, straining health systems and further depleting government budgets – with no end in sight for many. The economic impact of COVID-19 has knocked retirement planning sideways as investment markets recoil, interest rates remain at rock bottom and corporations pull back on the dividend payments upon which pensions rely.
As we saw during the 2008 financial crisis, one in ten organizations paused matching pensions contributions – and we know from that crisis that for many individuals, their finances never fully recovered. Extra freedoms have been allowed in some countries to draw from pension pots early, but this is like robbing Peter to pay Paul. In the United States, some estimates suggest that over half of Americans will ultimately need to delay retirement due to investment withdrawals and reduced contributions.
So how can we start to reverse these trends and redesign a retirement that builds the necessary financial resilience for longer lives? The Forum and Mercer have partnered this year to explore answers to that question. Our research has integrated the insights of almost 200 experts from more than 120 global organizations. Using a design thinking methodology, health professionals, financial experts, entrepreneurs, investors, actuaries, HR professionals, retired persons and academics poured their wisdom into devising practical solutions for real people.
The key conclusion? We must redesign retirement by creating new ways to become financially resilient - ways that work across the divides and suit personal and often very different individual circumstances. We prescribe a new way that offers fairness, flexibility and choice for everyone. We have distilled the insights from our research and emerging design framework into a ten-point checklist for success, with actions required across four stakeholder groups:
1. Unlock creative additional income sources that can support you in later life – teach if you can, participate in the sharing economy, make things.
2. Improve your financial know-how so you can plan with confidence – don’t leave financial outcomes to guess work.
3. Your health and your skills underpin your ability to work, earn and save – invest in them.
4. Create more flexible work and retirement models so that people can work, earn and save into later life to supplement low pensions.
5. Employees trust you to help them retire well - promote wellbeing programmes that include physical, mental and financial support and education, in order to deserve that trust and develop resilient employees.
6. Enable mid-life and ongoing regular check-ups so that people can assess their short, medium and long-term financial resilience, with time to get on track.
Financial services providers
7. Make it easier for people to understand their total financial position. Financial resilience means being able to survive short, medium and long-term scenarios.
8. Redesign age-appropriate financial tools and products with age in mind – remember no one self-identifies as old! Accessibility to such vital resources is key.
9. Raise levels of awareness of the financial implications of longevity; ensure that employment and pensions regulatory frameworks support flexible work and flexible retirement. This means enabling drawing pension while still working, and drawing pension earlier or later depending on personal circumstances.
10. Impose tougher penalties for age bias – too many older workers become excluded from the workforce because of age. Financial resilience will never be achieved if people cannot work, earn and save.
Much is unknown about what our post-COVID world will look like, but there is one certainty: we will not be able to redesign retirement with one silver bullet such as a simple tweak to pension schemes, the creation of a new financial product, or a campaign to increase financial literacy.
Safeguarding financial wellness over the course of longer life will require taking an all-encompassing view of a person. This means their tangible assets (including savings and assets such as property), but also less tangible assets such as their health, their skills and career readiness to work longer.
It will also require coordinated efforts across stakeholder groups, each playing a critical part. The research is not exhaustive and there are many more recommendations, but this quick- win list is a good starting point for the complex task of redesigning retirement for the future.