How will an aging population, new forms of labor, and regulatory changes affect the Life Insurance and Pension market across the Nordics? As EU tries to promote more individual responsibility, customer engagement now becomes key to insurers since they must change from B2B to B2C.
Europe is confronted with several retirement issues connected to an aging population with less people working. In 1980, there were two people older than 65 years for every ten people of working age in the OECD, a number that has increased to three in 2020 and is projected to reach almost six by 2060. As population ageing is accelerating in most OECD countries, the pressure to maintain adequate and financially sustainable levels of pensions continues.
The EU commission and its member states are taking different measures for reforming the public pensions systems. For example, slightly more than half of the OECD countries are increasing the retirement age, from 63.8 years to 65.9 years on an average by about 2060. Other measures include development of collective savings schemes and an increase in contributions.
Increased Individual Responsibility
However, this isn’t enough. Most member states will need to do more given the long-term trends they are facing. Voluntary private pension products will thus play a central role in helping pensioners to maintain an adequate level of income. Still, too many Europeans are channeling their savings into bank deposits rather than supplementary pension schemes – despite lower returns.
Through different measures, EU is now trying to promote two things across all member states: how to make individuals take more responsibility for their own pension, and how to make the governments in the member states be less responsible for providing social security.
Portability of Pensions
Another issue on EU’s agenda is portability of pensions. People from Northern Europe have started to settle down in South Europe, but rules for transferring pensions to a different country are still unclear. The optional Pan-European personal pension product (PEPP) is a cross-border product for individuals in the member states. It’s a response to changing demographics due to the aging of the population, the modern forms of labor, and embracing the opportunities of digitalization. PEPP is designed to give savers more choice and provide them with more competitive products, while enjoying strong consumer protection.
Besides from this, each member state is also looking into trends such and to adapt accordingly while making it easier for individuals. Eget Pensjonskonto in Norway is an example of a reform towards individualization of the Norwegian pension system.
Defined Contribution Plan
Another change, especially noticeable in Norway and Denmark, is how retirement pensions for public sector employees and unions are organized. When an individual is retiring, historically he or she has had a guarantee pension in respective of how the market is performing – relying on a defined-benefit pension plan. This meant that the risk has been on the provider.
Now, with a defined contribution plan, that allows employees and employers to contribute and invest funds over time to save for retirement, the risk is increasingly put onto individuals rather than the state.
The Impact for Insurers
What do the changes mean to insurance companies? As the individuals are nudged to take responsibility for their own retirement savings, their decision points are increasing. Solving the advisory gap and enabling individuals to understand and own their retirement, will thus be a key challenge for Life Insurance and Pension Providers.
Most importantly, the providers need to enable the ability to interact with customers as individuals. Previously, insurers have had B2B relationships with the employers, and never had to use processes and digital systems to understand individuals. All this is changing now. To succeed, insurers need to strengthen several capabilities:
All in all, regulatory changes, combined with the technological progress and its adoption by consumers, are forcing a reformation of the essential elements of the Life Insurance and Pension market in the Nordics. For more information about the future of insurance, also check out Preparing for a Post-Pandemics World in Nordic Insurance Sector as well as Cognizant's insurance solutions.
The “Egen Pensjonskonto” (Own Pension Account) reform is a major leap towards individualization of the Norwegian pension system. This is the first paper in a series of three exploring what the reform means for the pension industry and individuals.