The Institute and Faculty of Actuaries (IFoA) has published a report that calls for urgent action by policymakers, employers and the financial services industry to tackle risk transfer as a systemic failure, and recommends practical solutions.

The report follows IFoA’s Great Risk Transfer, a campaign launched in January 2020.

The initiative was set up to investigate the ways in which risk is increasingly being transferred from institutions to individuals, especially when it comes to the planning of finances.

IFoA said actuaries work across many areas of the financial sector, with a focus on understanding and managing risk and uncertainty. “In order to bring a distinctive and meaningful contribution to this debate, our recommendations focus on the actuarial aspects of this trend in the transfer of risk, particularly in relation to pensions and insurance,” it said.

John Taylor, immediate past president of the IFoA, said: “Transfer of risk to individuals has been driven by governments and companies seeking to reduce their risks. While this may be a rational strategy for these institutions, it has had damaging impacts for consumers and society as a whole.”

He believes that risk transfer “represents an even wider systemic failure than well-known examples such as the widespread misselling of Payment Protection Insurance”.

Taylor said IFoA has an important role to play and is committed to offering its actuarial expertise in relevant areas, and to promoting solutions and best practice.

The report’s recommendations fall into two categories: rebalancing risk by shifting some key responsibilities back towards institutions, and helping consumers with financial decision making.

“We have put much effort, time and resource into understanding the bigger picture on the Great Risk Transfer [campaign] and to developing evidence-based recommendations,” Taylor said, adding that its call for evidence early last year demonstrated that this trend “is deep seated and long term in nature”.

He added: “We believe there are opportunities to rebalance risk away from consumers back to institutions in a way that is likely to benefit society as a whole in the long run.

Recommendations on rebalancing risks:

  • Government action to show employers that collective defined contribution (CDC) pension schemes are an attractive alternative to defined contribution (DC) schemes.
  • Government to consider extending default pathways for drawing on retirement savings to all retirees, to reduce the risk of individuals running out of money during retirement.
  • Government, industry and the IFoA to determine a minimum level of insurance protection needed for all.
  • IFoA to promote research into factors that make a model such as Flood Re successful, and how such models might be applied to other risks to improve access to affordable insurance for all consumers.
  • The Pension Regulator’s defined benefit (DB) funding Code of Practice to make avoiding scheme closures an equal priority with member security.
  • HM Treasury to consider whether changes to the Solvency II framework in the UK could incentivise insurers to develop products that offer consumers investment guarantees.

Recommendations to help consumers with financial decision-making:

  • Financial Conduct Authority (FCA) to set ambitious target to increase individual take-up of Pension Wise appointments before accessing pension.
  • Money and Pensions Service Dashboard Steering Group to prioritise the way retirement income is estimated and presented in a consistent way.
  • FCA to put in place regulation or guidance to strengthen consumer protection in risk transfer incentive exercises, eg those used for Periodical Payment Orders.
  • Government to reinvigorate its public messaging around minimum pension savings levels, in particular auto enrolment.

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