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




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

http://beginningandend.com/wp-content/uploads/2012/08/RFID-Microchip-Smart-Pill-How-it-Works-New-World-Order.jpg

http://beginningandend.com/wp-content/uploads/2012/08/RFID-Microchip-Smart-Pill-How-it-Works-New-World-Order.jpg

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


─ Consumer behaviors – simple, connected, immersive, interactive, tailored

─ Risks – economic, market, financial, health, cognitive

─ Retirement Allocations – upside, floor, longevity, and reserve portfolios



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


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


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



─ Fiduciary regulation

─ Demographic pressures

─ Robo-advisors


16

PwC 17


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



• 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


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


+ =

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


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


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


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


The model includes a range of components that simulate a variety of scenarios – economic, market, individual, household – over the lifetime of individuals

PwC 30


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

For Additional Information Contact:

Anand RaoPwC

[email protected]

mailto:[email protected]

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


39

PwC

Customer Demographic Dashboard


40

PwC

Annuity Behavior Dashboard


41

PwC

Economic Environment View


42

PwC

Economic Control Panel


43

PwC

Consumer Finance Control Panel


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


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


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.

mega trends and implications to retirement

Economy & Finance