High Expectations

A] Prelude

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B] The Issue

How much does one need to live on in retirement? The Lucerne University of Applied Sciences and Arts examined again the financial and retirement planning knowledge of the Swiss working population.

This year’s focus was on the expectations of actively insured individuals regarding retirement planning. The study focused on the level of retirement benefits deemed necessary from the insured individuals’ perspective, the preferred method of receiving retirement funds, and their assessment and evaluation of different pension models.

C] 60% Not Sufficient

The State Pension called AHV (1st pillar), together with occupational pension plans (2nd pillar), is intended to enable insured individuals to maintain their accustomed standard of living in old age in an appropriate manner. The Swiss social policy target is a replacement rate of around 60 percent of final earned income.

However, the expectations of currently insured individuals are higher: Three out of four respondents consider a replacement rate of more than 60 percent necessary to feel just as financially secure in old age as they do today. “One in three respondents even considers a rate of over 80 percent necessary to maintain their current standard of living,” says study director Yvonne Seiler Zimmermann. Only 15 percent consider a replacement rate of 60 percent or less to be sufficient.

D] Greater Variety Requested

When it comes to the preferred method of drawing down retirement savings, the survey shows that, from their current perspective, half of the respondents would opt for a combination of a lump sum and an annuity.

An annuity-only option is preferred more often than a lump-sum-only option. Different motivations come to the fore depending on the preferred method of withdrawal. “In addition to the need for a secure income, the amount of retirement savings accumulated, financial flexibility, and personal life expectancy play a particularly important role,” says Seiler Zimmermann.

Especially given the growing popularity of lump-sum withdrawals and the desire for financial flexibility, the question arises as to whether different pension models take into account the individual needs of the insured and thus make pension receipt more attractive. There is great interest in additional options: over 80 percent of respondents would generally view it as positive if their pension fund offered various pension models.

E] Flexible Annual Pay-Out

However, the appeal of individual pension models depends on their specific design. “Models that offer choices regarding the pension amount score particularly well,” says study director Seiler Zimmermann. “Sixty percent of respondents indicate that such pension models would increase their willingness to receive their retirement savings as a pension rather than as a lump sum. Among those who prefer a combination of a lump sum and a pension, this proportion is even over 70 percent.”

F] Gaps In Knowledge

Greater flexibility and individual choices go hand in hand with greater personal responsibility. “Different withdrawal options and pension models expand individuals’ scope for action, but also require that policyholders be able to assess the long-term financial consequences and apply them to their own retirement situation,” says Seiler Zimmermann.

Challenges persist in this area in particular. “While financial and retirement planning knowledge has improved compared to last year, retirement planning knowledge still lags significantly behind financial knowledge.”

Knowledge gaps exist particularly when it comes to personal retirement planning. In addition, many insured individuals are unaware of their own knowledge gaps, and a significant proportion do not sufficiently understand their own retirement statement.

G] Finally

This highlights a tension between the desire for individual choices and the prerequisites for being able to exercise those choices responsibly with regard to one’s own retirement planning.

Greater flexibility in retirement planning increases the need for understandable information, educational opportunities, and advice so that insured individuals can assess the consequences of their decisions and make informed choices about their retirement planning.

As EPH we confirm the correctness of this statement. We often see in especially international pension planning cases that clients do not yet have an accurate insight in all available options, their limitations and (inter)national tax and investment implications.

A fine example of which is the matter of annuity versus (partial) lump sum. An annuity does not provide substantial extra return in case of low interest rates and then only reduces flexibility. Whereas regarding the lump sum one has to be carefull to not in a voluntary manner propel oneself into a higher income tax rate bracket.

So it is all about knowing all aspects and translating them into the best solution for the particular client. That is why good advice does not cost money. It builds and protects capital!

H] EIOPA’s Policy

As EPH we are always interested to see what the EU’s regulatory pension and insurance authority called EIOPA has to say about an issue and what their policy is.

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(Sources: myscience/EPH)