The nature of pension planning has clearly changed as active working people today are building up smaller pensions. As a result people are now more often confronted with the outlook of having insufficient income for all their intended future expenses.

The traditional standard for a decent pension, 70% of the last-earned salary, has become too costly to guarantee for everyone. As a result, pension schemes have increasingly become austere over the last two decades. And closely related to this, risks have gradually been moved from the collective to the individual.

Taking responsibility

The consequence is that people will have to take greater responsibility for their own retirement and become more aware of the various options they have. Can or should they build up more pension in the accrual phase? What degree of certainty do they strive for? How can they manage their longevity risk (the risk of not having enough income for the intended expenses if people live longer than expected)? And what investment risks do they want to run? Do they choose for a fixed pension income at retirement age, or for continued investing and the risks that come with it, or for a combination of the two?


To be able to make sound decisions, consumers must gather the right sort of information. Models that merely work with an expected return do not suffice, because returns can fluctuate considerably. This uncertainty must be incorporated in the pension planning. In the United Kingdom advisors have experience with legislation in which consumers are allowed to withdraw 25% net. Is it smart for people to withdraw money to purchase a car or put it into a personal savings account? People also struggle with the remaining amount on which taxes have to be paid: is that one-time or periodically? Will they continue to invest or purchase an annuity? A proper model for pension planning takes all these uncertainties into account

Capacity to bear losses

With the increased transparency stimulated by regulation people better understand how much is charged for financial advice, and many consumers experience it as rather expensive. The art therefore is to give good sound advice with clear added value. To do so, one needs a wealth of knowledge. It is challenging for the financial market to properly manage the longevity risk and to incorporate the investment risk with it. Are people willing to take the investment risk and also able to do so? Conform MiFID II an advisor must judge whether someone has the capacity to bear losses. The question here is how clients define that risk and how financial institutions and consumers will determine it. A financial institution can only determine that risk at the level of the client. An advisor should look what type of risks are applicable and inform people thereof. It is important to determine what risk a client CAN take, what is the capacity to bear losses, and is WILLING to take. This way clients not only understand what factors has been taken into account, but also know why a specific pension advice is given.


Ronald Janssen
Managing Director Goal-Based Planning
+31 10 700 56 97

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