By Marcus Karlsson
Co-Founder, The Third Act
From behavioural research, we know that complexity is a strong contributing factor to low engagement. This is true for pensions as it is considered complex, in particular when you are getting closer to retirement. Before retiring, most people will have to make a variety of choices that will have major consequences for the pension they will receive. Examples of choices are the way in which you want to withdraw the pension, survivor protection and the desired level of pension income. It is also common to wish to have a slightly higher pension at the beginning of your pension when envisioning a more active life. However, it affects the future pension that you will live on for the rest of your life.
Choosing the right insurance cover will also have consequences for pension income. For example, maintaining survivor protection during a period when the pension begins to be paid out can have major impact for the pension income.
We have previously discussed that the complexity of the pension is largely due to the fact that communication to the end customer is based on the individual parts of the pension. “Pension är det viktigaste sparande men det vi ägnar minst tid åt”. This becomes especially obvious when a customer wants to adjust how the pension is to be paid out.
Here we describe a concrete example: A person has 10 different insurance policies when she retires and wants a higher pension for the first 10 years. The higher pension is achieved by changing the payment period on one or more insurance policies so that these are paid out over a shorter period. That will then create a higher pension income. The challenge is that these insurances can be combined in 1,024 different ways to create the higher pension in the beginning. And then the question of, for example, survivor protection has not yet been addressed!
In reality, it is practically impossible for a customer to tailor a withdrawal plan if they have more than a couple of different insurance contracts. The number of different possible combinations makes it impossible. The basic problem is again that pensions are presented in the different parts and that advice before retirement is underserved by market participants such as insurance companies and insurance intermediaries. The responsibility for planning lies with individuals, but in practice there is no way to take this responsibility.
The Third Act provides a service that helps the individual to set up a bespoke withdrawal plan. Letting the customer change individual insurance policies themselves and by “trial and error” trying to get a combination that fit their needs is of little help. We have instead turned the question around as the customer states the desired pension income for different payment periods. Then The Third Acts service optimizes how different insurance contracts should be adjusted to get a pension that is as close to the desired income as possible. In the example above, we test all 1,024 possible combinations and present the outcome that is closest to the customer’s desire.