Age should not be the sole factor that distinguishes clients

Almost every industry has embraced “data” to develop personalised products to suit their customers’ needs. Shouldn’t the retirement industry follow suit?

The retirement industry has effectively painted all members of the same age with the same brush and ignored crucial differences that exist which could materially impact members’ retirement requirements.

recently celebrated a birthday with my twin brother. At our birthday dinner, my parents, in what is an endearing tradition, handed us each a birthday card, virtually identical except for the colours and only subtly different birthday wishes. This wasn’t unusual — it was just another example of the pains they have gone through to ensure we are treated equally.

When we were growing up, creating equal experiences for us was our parents’ mantra, from ensuring that we each received R1 every Friday to spend at the tuck shop to gifting us with identical bicycles for Christmas despite my desperate pleas for a Barbie dollhouse. By now, you would have guessed that we’re twins of the opposite gender! However, notwithstanding our parents’ best attempts to treat us the same — we are both very much individuals and have made different life choices. We have pursued different careers, we have different family structures I am married with two adorable sons while he remains an eligible bachelor!, 633i and we have different aspirations.

This means that we have different household incomes, and a very different set of monthly expenses. By extension, we are likely to also have very different income needs when we reach retirement. Yet, if we were part of the same retirement fund, we may be invested in the same way. For many South Africans, their largest, if not only, form of retirement savings is through the retirement funds offered by their employers. We have seen that most members are invested in the fund’s default investment strategy, despite funds offering members investment choice.

The default investment strategy is therefore crucial. These default investment strategies usually differ only according to a member’s age. Therefore, if my twin and I belonged to the same retirement fund and were in their default strategy, we would be placed in the same investment strategy — despite our different retirement needs.

The retirement industry has effectively painted all members of the same age with the same brush and ignored crucial differences which exist that could materially impact members’ retirement requirements. This is definitely not the norm in similar industries. In the world of life annuities, an insurer is required to pay the annuitant a pension for as long as they are alive.

Life insurers offering these products have long recognised the impact that age, gender and income have on the life expectancy of retirees, and the resultant price of annuities. A lowcost product provider estimates that men can earn 12% more income on average than women when buying an annuity all else being equal. Ask anyone who has recently filled out an application form — they have had to disclose information about their income, medical history, health status, smoking status, eating habits, etc. — much more than just their age.

Recent advances in technology now make it possible for retirement funds to put in place investment strategies that are customised per member, based on their unique retirement needs and specific circumstances, considering a variety of factors — not just the member’s age. For example, a strategy is designed based on each member’s income needs in retirement, their retirement age, their life expectancy, their accumulated savings, and their contribution rates while also taking into account market factors such as market performance and interest rates.

This will allow my brother and me to be invested in different investment strategies suited for our different needs. For example, my investment strategy can be tailored to allow me to leave a legacy to my children, and take cognisance of the fact that I’m likely to live longer and may want to retire earlier, but that I also have a healthy balance of accumulated savings having contributed the maximum I could and diligently preserved my retirement savings when changing jobs, as expected from a responsible actuary.

In a world where technology is changing the face of many industries think Uber, Airbnb and iTunes and online engagements can be personalised to reflect our own preferences as indicated by us or using data about us, it is hardly surprising that retirement funds would look to use the data they have available and embrace this wave of change and technology to create personalised investment strategies. These strategies are then continuously monitored to ensure they’re on track for each member, as time passes, markets change and retirement needs evolve.

Therefore, the retirement industry as we know it today currently treats my brother and me as equals — applying the same investment strategy to both of us — something my parents will no doubt be pleased about. However, in the near future, the industry may be changing to design investment strategies that recognise us for the individuals we are. A very welcome change indeed!

– Trinisha Chanka is an actuary at Colourfield Liability Solutions.