Download - Mega Trends and Implications to Retirement
Mega-Trends and Implications
RMI Discussion
September 2015
www.pwc.com
PwC
Agenda
• Mega trends
• Implications of Mega Trends to consumers
• Implications of Mega Trends to retirement advisors
• Leveraging RIM for consumers and retirement advisors
2
PwC
Agenda
• Mega trends
─ Social – More older people, living longer, and healthier
─ Technological – Medical, robotic, and AI advances
─ Environmental – Climate change and resource scarcity
─ Economic – Increasing financial burden on individuals, societies and Govt.
─ Political – Pensions, medical, and technology policies
• Implications of Mega Trends to consumers
• Implications of Mega Trends to retirement advisors
• Leveraging RIM for consumers and retirement advisors
3
PwC 4
Social
More older people…
US population over 65 will increase from 40 million in 2010 to 88 million by 2050
(Administration on Aging)
PwC 5
Social
…living longer
Life Expectancy
at Birth
increased from
39 years in 1880
to 79 in 2011 in
US
PwC 6
Social
…living healthier
Source: The determinants of mortality by Cutler, Deaton, and Leras-Muney. Journal of Economic
Perspective, Summer 2006
PwC 7
Technology
Advances in computing, medical, and manufacturing technologies are leading to better lives for more people
TechnologyTrends
1
5
4
2
3
Mobility & Sensors
Nanotechnology
Robotics
Artificial Intelligence
Genomics
PwC 8
Technology – Mobility & Sensors
Sensors that are implantable, printable, and ingestible will monitor and dispense medication to sick and healthy consumers
Flexible Electronic Chips
Chips on a Pill
Tattoos for Glucometers
Digitization of Healthcare will impact us profoundly
Sources: The Wall Street Journal , mhealthwatch.com, greenhealingnow.com, NASA Spinoff, beginningandend.com , www.tuaw.com , www.forbes.com; www.reuters.com; Medgadget LLC
$34 Handheld Smartphone Device Diagnoses Disease
Apple Watch app Tracks Glucose Levels for Diabetics
PwC 9
Technology – Genomics & Nanotechnology
Falling costs of genome sequencing, advances in genomic engineering, organs-on-a-chip & 3D printing are enabling personalized medicine for the masses
PwC 10
Technology – Robotics and Artificial Intelligence
Artificial Intelligence and robotics advances are enabling better understanding and interactions between humans and machines
Artificial Intelligence Techniques Elderly Care Robots
PwC 11
Economic & Political
Burden of funding retirement will increasingly fall on the individual and the household for a larger proportion of society
Source: People born today won’t get pension until age 77, PwC UK Report
PwC
Agenda
• Mega trends
• Implications of Mega Trends to consumers
─ Consumer behaviors – simple, connected, immersive, interactive, tailored
─ Risks – economic, market, financial, health, cognitive
─ Retirement Allocations – upside, floor, longevity, and reserve portfolios
• Implications of Mega Trends to retirement advisors
• Leveraging RIM for consumers and retirement advisors
12
PwC 13
Implications of Mega Trends to Consumers -
Individuals are seeking simple, connected, immersive, interactive and tailored experiences from their advisors and financial service providers
Simplicity of presentation, clarity of communication, and ease of use
Simple
Consistency and lack of friction across channels, organisation and products
Connected
Engaging interaction presented with a high degree of fit and finish
Immersive
Open and genuine two way dialogue, engaging through social channels
Interactive
Leveraging data and awareness of customer context to maximise relevance
Tailored
1234
5
PwC 14
Implications of Mega Trends to Consumers -
Individuals and households have to manage a variety of risks – some that are within their control and some outside their control
Risks
1
5
4
2
3
Economic Risk
Longevity Risk
Policy Risk
Consumption Risk
Market Risk
PwC 15
Implications of Mega Trends to Consumers -
RIIA’s retirement allocations allows individuals and households to manage different types of risks
Retirement Allocations
Retain risk to create upside potential
Upside Portfolio.
Risk RetentionManage risk to protect
against downside
Floor Portfolio.
Risk Management
Avoid risk by carrying adequate reserves
Reserves Portfolio.
Risk Avoidance
Pool risk to provide for longevity
Longevity Portfolio
Risk Pooling
PwC
Agenda
• Mega trends
• Implications of Mega Trends to consumers
• Implications of Mega Trends to retirement advisors
─ Fiduciary regulation
─ Demographic pressures
─ Robo-advisors
• Leveraging RIM for consumers and retirement advisors
16
PwC 17
Implications of Mega Trends to Consumers -
Financial advisors are facing significant challenges with increased regulations, demographic pressures, and the advent of robo-advisors
Source: Top 3 issues financial planners will face in 2014, by Michael Kitces, in Nerd’s Eye View, Jan 2014
• Fiduciary Regulations: As a fiduciary the
adviser must provide impartial advice in
their client's best interest and cannot
accept any payments creating conflicts of
interest unless they qualify for a new
exemption intended to assure that the
customer is adequately protected.
• Demographic Pressures: Falling number
of financial advisors, ageing of financial
advisors and difficulty of recruiting younger
talent
• Robo-advisors: Significant investments
from traditional and VC firms morphing the
area of robo-advice from direct-to-
consumer investment advice to omni-
channel investmenr advice
PwC
Agenda
• Mega trends
• Implications of Mega Trends to consumers
• Implications of Mega Trends to retirement advisors
• Leveraging Retirement Income Model
─ Holistic household view
─ Synthetic US population – individuals and households
─ Behavioral economics & simulations
─ Cradle-to-Grave
─ Scenario-based planning
18
PwC
The Retirement Income Model is a tool that leverages six key features to address the consumer, advisor and financial service provider needs
19
RIM Highlights
2
Synthetic US Population /Household
Cradle to Grave Simulations
Scenario Based Planning
BehavioralEconomics & Simulation
Holistic Household View
1
3
4
5
Retirement Income Model
PwC
… and create forward looking HHBS accounting for real world relationships and consumer behavior for holistic planning
20
Holistic Household View
Life Events
• Getting married
• Buying a house
• Having a child
• Retiring
Income Statement
• Salary
• Expenses
1. Nondiscretionary
2. Discretionary
3. Health costs
Balance Sheet
• Assets
1. Home
2. Financial assets
• Liabilities
1. Mortgage
2. Personal debt
Choices
• Rational
• Behavioral
1. Mental accounting
2. Joint decision making
3. Financial literacy
PwC 21
Comprehensive projectable survey of US households’ financial needs, demographics, products, services, channels, and attitudes with nearly 4,000 variables.
MacroMonitorData
Sample Household Balance Sheet (HHBS) and IE
Statement
Synthetic US Population/Household
SBI’s MacroMonitor survey and RIIA’s methodology provides cross-silo view of consumers’ balance sheet (BS), income & expense (IE) statement
PwC
External data can be used with recordkeeping data to create a more complete view of participant level household financial profiles
Synthetic US Population/Household
Strategic Business Insights (SBI) MacroMonitor –Comprehensive projectable survey of US households’ financial needs, demographics, products, services, channels, and attitudes with nearly 4,000 variables.
1. Bureau of Labor Statistics (BLS) – Consumer Expenditure Survey (CES) of US households’ annual expenditures for food, clothing, shelter, health, utilities, transportation, supplies, entertainment, etc.
2. Employee Benefits Research Institute (EBRI)
3. National Bureau of Economic Research (NBER)
4. Other sources – Social Security, and other sources of socio-economic, health care, and retirement data.
22
PwC
Using ‘big data’ techniques PwC has fused ‘broad & shallow’ datasets with ‘narrow & deep’ datasets …
23
Synthetic US Population/Household
+ =
Surveys e.g., SBI’s MacroMonitor Data• 4,000-5,000 households• 100’s of variables
Market Data e.g., US Census• 320 Million households• 10’s of variables
Narrow & Deep Datasets
Broad & Shallow Data
HHBS/IE Data for Synthetic US Population• Millions of househilds• 100’s or 1000’s of variables
Synthetic Population
Deterministic
Non-Parametric Parametric
Stochastic
• Nearest neighbor algorithm • Hot-deck Imputation
• Conditional mean matching • Markov Chain Monte Carlo • Bayesian Data Augmentation
PwC
…to create a synthetic US population and their HHBS and IE statement
24
Synthetic US Population/Household
Environmental Factors
Economics Factors
Consumer Financial Behavior
Synthetic US Population
PwC
Behavioral Simulation
Simulation of how individuals really make decisions and their emergent group behaviors based on modeling individual behaviors as ‘agents’. Choice made by individuals get reflected as ‘market-level’ emergent behaviors that are calibrated with actual and survey data
LARI uses behavioral simulation that combines agent-based modeling and behavioral economics to model individual decision-making and emergent behaviors
Artificial IntelligenceCognitive thought throughmachines
Complex SystemsEmergent system behavior from individual actions
Computational PowerRapid cycle-timefor intensive calculations
Agent Based Modeling
Sophisticated, computationally intensive modeling technique that relies upon a decentralized set of behavioral rules and studies emergent behaviors
Classical EconomicsIndividual decision-making driven by self-interest and utility maximization
PsychologyScientific study of mental functions and behaviors ofindividuals and groups
Behavioral Economics
Study of individual decision-making based on cognitive, heuristic, emotional and social factors
+
+
+
+
=
=
=
25
Behavioral Economics & Simulation
PwC
Interactions between the model and the real-world allows us validate and infer individual behaviors and emergent properties
26
Agent-based modeling simulates agents’ (e.g., individuals and companies) interactions with their environment and other agents in order to understand the emergent behavior of complex systems.
Problem definition
Data collection
Monitor results
Define pilot
Implement pilot
Simulate
Validate model
Real world outcomes
Simulate
Design model
Behavioral Economics & Simulation
Each agent encodes the behavioral economic principles (e.g., defaults, risk aversion etc) based on their own personal characteristics to act
PwC
Behavioral economics, behavioral simulations and interventions are used to validate and infer individual and household behaviors
27
Behavioral Economics & Simulation
PwC 28
Dependents Single & ‘Rich’ Growing Family Pre-Retiree Retiree New Generation
Liability Creation
Asset Transfer
Asset Creation Asset Creation
Asset Protection
Asset Preservation
Asset Depletion
Po
licyh
old
er
Life
-Cycle
Sta
ge
sL
ife
Eve
nts
Ad
vic
e
Asset Cycle
• Paying off student loans
• Starting a career
• Getting married
• Buying a home
• Having or adopting children
• Paying tuition bills
• Caring for parents
• Planning for retirement
• Withdrawal money for retirement
• Paying for health care
• Creating a legacy
Understanding life events and choices
Life events change the individual’s understanding of themselves and their relationship to others and to the environment.
Cradle-to-Grave Simulations
PwC
Synthetic Policyholder Population
Projected Product
Attributes
Projected Policyholder
Attributes
Competitive Factors
Economic Factors
Policyholder Factors
ProjectedSavings
Behavior
Parameters(For ‘what-if’ analysis)
Model ‘Agents’
Scenario Outputs
Simulation Model
Withdrawal
Medical
PolicyholderBehaviors
Social Security
Savings
Products
Economic Environment
Advisors&
Company
Policyholders
External Data
Views & Calibration
ProjectedWithdrawal
Behavior
ScenarioCombination
Scenario Inputs
29
Assumptions&
Scenarios
Scenario Based Planning
The model includes a range of components that simulate a variety of scenarios – economic, market, individual, household – over the lifetime of individuals
PwC 30
Scenario Based Planning
Comparison with ‘someone like you’ and ‘what if’ analysis allows individuals and advisors to navigate the uncertainties of the future
Cradle-to-
grave planning
Individual
scenarios
PwC
RIM combines power of data, advanced analytics and behavioral economics principles to generate actionable insights
The Retirement Income Model (RIM)
ANALYSIS & SYNTHESIS
Behavioral Simulation
Synthetic Population
Household Fundedness
Scenario Building
Once upon a time Once
upon a time Once upon
What if?
ACTIONABLE INSIGHTS
Market Level Insights
Household Simulations
Product Level Insights
DATA INPUTS
Product Features
Healthcare Costs
HH Financials
HH Demographic Life Events
Macro-Economic
Used to project household financials,
the RIM features:
• Holistic financial planning
• Cradle to Grave Simulations
• Modeling of significant life events such as
marriage, employment, etc.
• Scenario based planning - Modeling
macroeconomic conditions like adverse
market returns, increased cost of living,
health shocks, etc.
• Modeling of evolving consumer behavior
and risk preferences across the household
31
RIM Summary
PwC
The capabilities of the RIM can also be leveraged to serve a number of functional mandates across the retirement services industry
32
Implications For The Industry (1/6)
4) Manufacturers
2) Distributors / Advisors
3) Plan Sponsors
1) Clients / Plan Participants
Key Implication:Manage products and services targeted specifically to different segments using household level RIM insights
Key Implication:Create financial plans (or design retirement plan menus) based on a holistic view of the client / participant household
Key Implication:Perform fiduciary responsibilities by actively monitoring retirement plan health
Key Implication:Education centered around “household like yours” benchmarks facilitated by the RIM
PwC
Based on insights from the RIM, retirement service providers may be able to pilot the following programs across different functions
Implications For Retirement Service Providers
1 2 3 4
• Optimize
savings/withdrawal rates
to and through retirement
• Piece of mind with
respect to retirement
readiness.
Individuals/Participants
• Optimize the level of
employee and retirement
benefits contribution
Employers / Sponsors
• Improve practice
management and grow
retirement book of
business through better
client engagement
• Effectively and efficiently
"know your client"
Financial Advisors
• Improve overall asset
growth and retention by
optimizing the range of
financial solutions via
the firm's platform shelf
(e.g. retirement,
employee benefits, etc.)
Head Office
Expected Outcomes Expected Outcomes Expected Outcomes Expected Outcomes
Participation Rate
Contribution Rate
Fiduciary Compliance
Employee Retention
Increased Book
Client Retention
Increased Book
Product Innovation
33
PwC
Pia Ramchandani
Our team:
David Gates Spencer Alee
Jayant Raj
Jamie Yoder Paul Blase
Johan Joseph
Mark Paich Pallav Ray
Karan Bagadiya
PwC
Larry CohenStrategic Business Insights
Acknowledgements:
Elvin TurnerRIIA – Market Insight Program
Francois GadenneRIIA
PwC
Appendix
PwC
Retirement Heat Map View
Appendix – RIM Screenshots
38
PwC
Household / Individual Micro-View
Appendix – RIM Screenshots
39
PwC
Customer Demographic Dashboard
Appendix – RIM Screenshots
40
PwC
Annuity Behavior Dashboard
Appendix – RIM Screenshots
41
PwC
Economic Environment View
Appendix – RIM Screenshots
42
PwC
Economic Control Panel
Appendix – RIM Screenshots
43
PwC
Consumer Finance Control Panel
Appendix – RIM Screenshots
44
PwC 45
Summarized RIM Insights from RIIA Publications
In previous conferences, we have shown how RIM can uncover key insights around HH fundedness and underlying financials, across segments and scenarios
#4 Older segments are much better
positioned to weather negative economic
situations
# 3 Scenarios (such as recessions or increased savings behaviors) can
have a big impact on fundedness
#5 Savings rate is important across life
stages – up to a certain level of wealth
#6 Decreased health, if it leads to increased health “events,” has
serious ramifications for fundedness
#2 Only older, Affluent and
Wealthy segments are unlikely to be
“underfunded” for their retirement
# 1 Availability of data and ability to compute “fundedness” plays a
critical role in fiduciary responsibilities
Population and fundedness in 2020
Fundedness
OF C UF
Marginal 42% 2% 2% 97%
Mass Market 41% 13% 18% 70%
Affluent 12% 54% 30% 16%
Wealthy 4% 86% 9% 4%
Fundedness
OF C UF
Starters 21% 3% 3% 95%
Builders 15% 14% 15% 71%
Preretired 37% 18% 16% 66%
Retired 28% 26% 12% 62%
PopulationWealth
Life Stage Population
PwC
We continue to release additional insights to the market in our publications and white papers
Summarized RIM Insights from RIIA Publications
46
RMI Papers
“Are Safe Withdrawal Rates Really Safe?” (Nov 2014) – Retirees struggle to answer the question of whether they should be withdrawing, 5.0%, 4.0%, or 3.5% of their savings every year. Which retirees should be more conservative? Under what scenarios should they revisit “safe withdrawal” assumptions?
“A Wider Look at the 80% Rule” (released Oct 2014)– The 80% rule states that people should aim to replace 80% of their preretirement gross income when they retire. However this widely used rule of thumb may not be right for very participant today or stay right for participants.
RIMSM Insights Report
“Using Behavioral Simulation to Drive Insights around Retirement preparation and strategies: The Retirement Income ModelSM
Insights Report”(Nov 2014)
• Fitness Maps – Calculation and comparison of different fundedness metrics, based on simulations
• Opportunity Maps – Projection of segment distribution, fundedness, and financial positions
• Glide Path Analysis – Perspectives on the impact of different “glide paths” on fundedness of segments
PwC
We continue to release additional insights to the market in our publications and white papers
47
Summarized RIM Insights from RIIA Publications
The “Sequence Of Consumption” Risk
In the retirement services community, people often speak of “sequence risk”, which refers primarily to asset performance. Using the RIM, we highlight the importance of “sequence of consumption risk” and show how different segments are affected by discretionary spending at inopportune times.
Retirement Budgeting Across Wealth Segments
Consumption in retirement typically decreases over time and increases towards the end, when all segments are taken into consideration. However, we show that this pattern varies considerably across wealth segments and this has enormous significance for manufacturers and distributors.
The True Privilege Of Wealth
By definition, wealthy household have generous quantities of assets at their disposal. Using the RIM, we also prove that in relative terms, their nondiscretionary expenditure during retirement is trivial. This may be owing to the fact that they typically have access to better preventive care and tend to have marginal levels of outstanding debt.