Narrow the Gaps

[IMPACT+: This series features IMPACT posts that take a longer look at vital topics that affect people.]

America’s life insurers believe everyone deserves a path to build financial certainty.

But we also recognize that more needs to be done to ensure everyone can achieve financial security. This point was reaffirmed by a new report from the Global Federation of Insurance Associations (GFIA) that highlights a $1 trillion global pension protection gap and identifies ways for lawmakers and private industry to lessen it.

The protection gap arose because the inflows into pension systems around the world are insufficient to sustain a reasonable standard of living with 65-70% income replacement for the next generation of retirees.

Demographic changes are putting unprecedented pressure on pension systems worldwide. The global share of people over 65 grew from 6.8% in 2000 to 9.3% in 2020, increasing the demand for pension disbursements. Public pension systems are under financial pressure due to falling birth rates and fewer people in the workforce contributing funds.

The GFIA report identifies several actions that lawmakers and private industry can take to ease the protection gap. For example, governments can help build an appropriate regulatory environment that encourages retirement savings and eliminates unnecessary barriers or costs by:

• Implementing tax incentives to encourage employees’ and employers’ pension contributions.

• Not imposing policy measures that inhibit access to financial advice for consumers with limited disposable income.
• Avoiding capital requirements that undermine insurers’ ability to invest long-term or offer long-term products and guarantees.

Pension needs and options are often difficult to understand for workers, especially for those whose retirement is decades away. The report says governments should promote savings and better financial education in schools so young people could start preparing for retirement earlier.

The report also recommends helping current workers better understand how much savings they may need for retirement. Disclosures that illustrate savings as monthly lifetime income annuity payments can help individuals better gauge whether they need to increase their retirement savings or revise their investment mix to meet their retirement income goals.

In addition, the report extolls the proven value of automatically enrolling new workers into retirement plans.

The pension gap was the largest of four critical protection gaps identified by the GFIA study. The others were a $0.9 trillion protection gap for cyber, a $0.8 trillion health protection gap, and a $0.1 trillion protection gap for natural catastrophes.

Narrowing protection gaps is the shared responsibility of private and public stakeholders. America’s life insurers, along with all of the insurance companies represented by GFIA members around the world, are committed to working alongside lawmakers to reduce the protection gaps and to help people and businesses access the insurance services they need to succeed and thrive.