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The Evolution of Pension Systems and Retirement

The goal for anyone who is saving for retirement remains the same as it was 150 years ago during the Industrial Revolution (when the first benefit -accruing pension schemes appeared in the world in 1876) – to fund our retirement for the rest of our lives so that we can sustain themselves respectfully for the remainder of our days.

The goal remains the same but there are very significant changes in the process, market realities, and the journey. And it’s still changing.

In the past, a pension was merely a workplace benefit, sometimes by a collective agreement and sometimes an agreement between an employer and an employee who received a tax incentive from the state. The board of trustees of the pension schemes did not realize how important their role was and purchased mainly state bonds that were very generous and had little chance of achieving a higher free-market return (although some argued differently). If there was a problem in funding the fund’s goals, the solution was by increasing the provisions of the workers and employers or slight changes in the benefits themselves.

When you look at Europe, you can see that the defined benefit pension plans of the leading companies (as most of the members are already close to retirement) are so massive that they look like pension funds that run the companies and not the other way around (see an example of British Airlines).

The Most Influential Player – The Advisors Who Deliver the Advice

In the defined contributions arena, the clients are forced or incentivized to save but they alone are responsible for their destinies and if the investment strategy they choose works they can live a life of security and dignity but if it does not then they could have a serious problem. 

The most influential player here is the advisors who deliver the advice. They must be trained not only to understand the risk exposure but also to understand the challenges of a family and their journey. 

We must bear in mind that this is not an insignificant issue that can be ignored. The importance of proper preparation and responsible management of plans is actually for the benefit of the future of all citizens. Who must with this money live a longer life than ever before and do not have the luxury of receiving bad advice or experimental and failing management because behind every investor is a family with dreams, expectations, and needs that could be shattered by a lack of experience and a lack of knowledge, processes, and skills.

We must respond immediately; every responsible person must see the clear picture before their eyes. Families need help, but only professional and responsible help that will lead them to retire with dignity that will require professional efficiency and transparent and efficient products.

The Question of Delivering Advice

In the past, the question of consulting was secondary. Insurance agents and investment advisers did not engage in building a strategy for a family to deal with their assets and liabilities. Their cash flows, their asset allocation, and risk management, they did not understand the importance of creating passive income, tax planning, and estate planning. They dealt mainly with life insurance and cash surpluses, as a complement to the main (pension) accumulation of assets. Pension funds and provident funds were simply distributed by the workplaces in industry arrangements that guaranteed the living that the worker was used to for the remainder of his life. 

But since the state realized it could not afford to guarantee an income for life in a world, where significant developments in medicine prolonged lives by a year and a half every 5 years, and those who reach the traditional retirement age need to plan for at least another 30 years!

The global trend was then to close the old funds with the special conditions and transferred all its citizens to funds that accumulate for their future in the free market.  

As a result, a new market reality was created. The reality is that production companies are responsible for the results of long-term investments and distribution channels, which have a significant impact on consumers, responsibility for advising and guiding customers to build a portfolio that can lead the consumer to the sacred goal of a sustainable retirement.

And here we all have a responsibility, to make sure that we do the best work for our customers and not just for ourselves. In this world, a professionals work model in transcending into a fiduciary standard for consultants towards their consumers and forces them to be part of a complex profession in which the business must understand risk management (including investment risks) investments, and asset allocation adapted to client’s needs, taxation and more.

The Question of the Allocation of Assets 

The first stage of long-term savings management is to establish a strategy for managing customer assets. 

Traditionally in the world, the policy for allocating assets is to allocate assets to equities and bonds and the question is what the mix is? This has been proven by academic research to be inadequate and dangerous. 

The policy of allocating assets to a fund in which trustees and advisers must adjust the fund’s assets to the risk profile of the individual and adapt to it as close as possible the correct mixture between growth assets (shares) and retention assets (bonds) is the trend that is receiving momentum in the world.

This policy certainly makes sense but creates another problem in which the question is asked how to really determine what the correct allocation for each age what shares and bonds are should the advisor offer in the mix. 

The Future is in Financial Planners Specialize in Life Cycle 

This policy creates significant exposure to short-term volatility, which is certainly a problem especially as experts are predicting a decade of instability and volatility in world markets. 

For this purpose, professional financial planners (backed by academic research) were created that specialize in life cycle management and are trained in all the methodologies of the family’s challenges, and put their clients’ best interests as their priority. 

Although this field is in its infancy, it is certainly a significant trend that must be taken seriously.

In recent years, we have been exposed to the need to expose customers to alternative investments such as credit, real estate, private equity, commodities for example as part of the asset allocation for clients (Gibson 1998 and Swanson of Yale), and thus reducing exposure to volatility and creating sustainable and trustworthy income sources and gains. 

About the Author
Dan Dobry was the founder of the Union of Financial Planners in Israel (UFPI), served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and from January 2019 is a member of the Committee for Standards and Qualifications for the European Union (SQC).
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