Pensions World

Interactive modelling can help members with the challenge of achieving the retirement income they want suggests Clive Witherington, Towers Watson

This prophetic quote comes from the two-time former World Heavyweight Boxing Champion and Olympic gold medallist – George Foreman. George eventually retired, after several comebacks, with his last fight at the age of 49.

Retiring at 49 is, alas, not an option open to most, but the quote from George illustrates the dilemma facing many people as they attempt to estimate at what age they can afford to retire and what they can do, by way of savings, to best influence their retirement income.

The challenge becomes more complex if you are unfamiliar with making investments but need to choose a level of savings and an investment fund or funds without a clear understanding of the effect on your retirement income or the relative risks and advantages of the investment choices available to you.

For members making money purchase based contributions as the main or supplementary source of retirement income, it is difficult to assess the risks, outcome and overall impact on retirement – so the majority will choose the default option.

Active participation

Those of us who administer members’ money purchase accounts, increasingly via online websites, are able to offer real time access to fund values, unit price data, switch requests, performance information, benefit statements etc. such that many money purchase members technically can manage their accounts and savings online. However, such sophisticated websites in isolation are insufficient to encourage members to be more active in their retirement plans.

One way of encouraging greater active member participation is through the use of interactive modellers which are integrated with the members’ data, retirement plans and wider investment portfolio.

Just as (stochastic) modellers would not have accurately predicted the outcome of any of George Foreman’s bouts, however much data was available, then stochastic modellers are not foolproof. The “lucky punch” cannot be forecast. However, they might have a place in the overall strategy of helping members have a greater influence and sense of understanding of their retirement income.

Strategy

You could deploy a modeller as the entry point to joining the plan or changing savings strategy. Typically at outset the member is asked to interact with the modeller to enter valuable data – such data will include:

• Information about current and expected income and outgoings which not only helps to assess what the member can afford to save and when but as importantly what the income and outgoings position looks like at retirement. This exercise helps to predict the level of income and thus the target the member needs to achieve.
• In completing the previous step, the member also enters information about other retirement benefits, savings and investment vehicles.

These steps are critical to the value any modeller can bring and if you introduce such modellers as part of your member engagement strategy then members will need help and encouragement to capture the right data – once captured, the results are worthwhile.

Understanding the target goes a long way to helping members appreciate the gap they need to fill.

Using simple but effective techniques, members can then model different savings amounts in conjunction with investment choices to assess the best combination of savings input and investment growth to attain the target income required. As the member interacts with the modeller then again using simple techniques, it is possible to show by graphics and text the relative degree of risk being contemplated depending on the choice of investment funds available.

Once the member has gone through this process, every time they log on they can receive an updated forecast of their retirement income versus their target. This approach is not necessarily to everyone’s taste, but it can be an effective tool as increasingly defined contribution based administration becomes more and more an online experience.

Clive Witherington is director of business development with the technology and administration solutions practice of Towers Watson; clive.witherington@towerswatson.com