A Framework for Communicating Value and Risk of Retirement Products
Document ID: 2009-1494
Published on: 30th June 2009
Author: Phil Mowbray
As the baby boomer generation approaches retirement, they face the challenge of making the transition from asset accumulation to decumulation or distribution.
At the same time regulatory and economic drivers mean that financial market risks, which were previously absorbed by the product provider or employer, are now being transferred to the individual. As a consequence, retail product manufacturers are enhancing their retirement propositions to reflect the needs of the retail customer to manage these risks more effectively. The result has been the development of more complex retirement solutions offering a range of benefits: long-term retirement income guarantees, flexible income levels, continued access to capital and the opportunity to increase income or death benefits in line with underlying market conditions.
Reflecting this shift towards ever more complex products, and the challenges this presents to product providers, distributors and customers we have developed a series of research reports that look at the following issues:
- A Framework for Communicating Value and Risk of Retirement Products: We discuss the existing barriers to effective communication and advice in relation to retirement income products. In this report we presented an analytic framework for measuring and communicating risk and value in a wide range of retirement income products. The framework is based on Barrie & Hibbert’s core stochastic model – the Economic Scenario Generator.
- Evaluating Third Way Retirement Income Products: We demonstrate how the framework can be used by financial advisers to better understand the range of products in the market. In particular, we focus on some of the existing Third Way products, using the framework to illustrate some of the benefits in these products. We show how the analytic approach enables advisors to select appropriate products based on specific customer objectives.
- Designing Retirement Portfolio Solutions: We show the framework can be used to help construct optimal Retirement Portfolio solutions for customers. We show how manufacturers and advisors may be able to build more effective retirement solutions through a portfolio approach, by allocating a customer’s retirement savings across more than one type of retirement product.