In the current system of individual defined contribution schemes, we use the lifecycle system to select the investments at participant level. Later, under the new pension system, we will once again work use lifecycles in the flexible defined contribution scheme.
By: Berry van Sonsbeek, Product Market Manager Zwitserleven
The composition of the lifecycle models will probably change to some extent under the new regime. This is because contributions at participant level become a flat percentage of pensionable earnings. In the old system, an increasing graduated scale was mostly used. Compared to the current system, contributions will increase at the beginning of your career and decrease towards the end. This change in the inflow of contributions to be invested requires a review of the existing lifecycle models for optimal results. In the end, the aim is to achieve the best possible pension for the participants under the new system.
We don’t know what we don’t know
If participants have the choice between various lifecycle models, they will be invited to let us understand their risk attitude and risk appetite. The aim will be to arrive at a proposal for a life cycle that best suits the participant. We have seen that this assessment of risk attitude and risk appetite has become more professional recently. And that’s a good thing, because superficial information and guidance can lead to choices that result in distressing situations.
One concern we have is that we are not always allowed or able to use relevant data. We are not aware of information that we do not know about the participant. This can affect the quality of our guidance in the choice of a lifecycle. Consider, for example, a situation where a participant still has pensions accrued elsewhere, but this is not taken into account when designing the investments in the new system. This can lead to taking too much or too little investment risk in the new system to achieve an optimal pension.
It is also important, when designing the individual investments or life cycle, to consider a person's overall financial position and expected spending pattern. If you don’t take these things into account, you will always end up with a sub-optimal selection of a participant's investments.
Role of the adviser
In the new pension system, there is an important role for pension providers to guide participants as best they can in making individual choices. I am convinced that for many participants it is advisable to have an adviser look at their situation. Someone who is familiar with the material and can also look at the total financial picture together with the participant. Ultimately, you want an investment mix that best suits the participant's personal situation and wishes. So this will be a dynamic lifecycle system, in which the lifecycle is regularly adjusted to the participant's changing wishes and circumstances.
Pension providers must fulfil their responsibility to give participants the best possible and most appropriate guidance on the choices to be made. Based on high-quality data and professional models.
I hope that prudence will not necessarily mean that we guide participants towards overly defensive investments. It is better to be honest and say that we do not have sufficient information to arrive at a good direction. If you do not do this, you may deprive a participant of an opportunity to achieve an optimum pension by investing too defensively.
This article is published on 01 November 2021