Harnessing data analytics for improved retirement outcomes

In this article, we explore insights shared in the ICA2023 concurrent session, 'The Practical Application of Data Analytics in Defined Contribution Retirement Funds to Improve Individual Member Outcomes.'

Actuaries John Anderson and Viresh Maharaj from Alex Forbes, South Africa, guided attendees through a comprehensive framework showcasing how data analytics can be leveraged to improve retirement outcomes for individual members.

A Global Paradigm Shift: The Transition from Defined Benefit to Defined Contribution

Anderson and Maharaj began their presentation by addressing the global shift from defined benefit (DB) to defined contribution (DC) pension provision.

This shift has placed the responsibility of retirement decision-making squarely on individuals, resulting in increased complexity that necessitates significant input and assistance from multiple stakeholders.

Unlocking Opportunities for Stakeholders to Improve Member Outcomes by Developing a Data Analytics Framework

The presenters emphasised that the overall outcomes experienced by individual members are profoundly influenced by various factors, including:

• the design and management of retirement funds;
• the efficacy of engagement programs;
• the utilisation of default arrangements; and
• choices made by members.

Although regulators and practitioners have strived to improve member outcomes, many arrangements still fall short of providing sufficient income during retirement.

To facilitate improvements in member outcomes, the presenters stressed the need for stakeholders to develop a comprehensive data analytics framework. Such a framework should not only provide valuable insights and practical interventions but also enable the measurement of impact, allowing for the exploration and experimentation of different solutions before scaling up.

They cautioned that theoretical solutions, while conceptually sound, often lacked practical consideration of behavioural issues and were impeded by the misalignment of interests of various parties.

The Role of Data Analytics for Trustees

The presenters delved into the reasons why data analytics is indispensable for trustees. Trustees make critical decisions on behalf of their members, including designing defaults and monitoring member engagement. By consolidating data sources and analytics platforms, trustees can inform decision-making processes, optimise member outcomes, navigate regulatory changes, and demonstrate adherence to legislation while safeguarding the best interests of members.

Practical Applications of Data Analytics

Drawing from their experience at Alex Forbes, Anderson and Maharaj shared practical examples of data analytics applications.

These revolved around three key areas: governance analytics, member analytics, and wellbeing analytics. Through these examples, they demonstrated the potential impact of data-driven decision-making on improving member outcomes. In particular, the presenters shed light on the following noteworthy examples of challenges in the retirement industry and corresponding data analytics initiatives, underscoring their imaginable significance:

• Low levels of preservation

In South Africa, members have the option to cash out their retirement savings when they switch jobs.

As a result, 90% of members take out cash when they change jobs, leaving only 6% of members in institutional retirement funds having a meaningful income replacement ratio upon retirement. Intelligent member engagement and predictive modelling can be used to encourage preservation of savings.

• Low levels of financial literacy among members

Utilising data transparency to connect decisions - such as contribution and investment strategies - with likely outcomes can help empower members to make their own informed choices.

• Low levels of financial literacy among trustees

Financial literacy across different hierarchies in South Africa is low.

Power structures within trustee level influence decision-making, often with authority vested in a chairperson or a small group. Behavioural biases and vested interests from these key people may inhibit good decision-making. Trustees can overcome this through transparent decision-making based on data, thereby enhancing governance, improving decision-making and building trust.

• Lack of an outcomes-based approach

In South Africa, stakeholders often focus on compliance and adherence to relevant legislation and regulation, but don't focus as much on enabling members to have adequate income in retirement.

Creating a "Member Impact Report" that connects trustee decisions to member behaviours and outcomes can bridge the gap between decisions made and actual or projected outcomes.

The Member Impact Report Dashboard: A Game-Changer

Anderson and Maharaj introduced the Member Impact Report dashboard developed by Alex Forbes, which leverages data from approximately one million retirement fund members. This powerful tool informs consultants' advice and provides valuable insights to retirement funds.

The dashboard includes aggregated member outcomes, fund-level contributions, average replacement ratios, demographics, employer analytics, and member behaviour at crucial stages of their journey.

Embracing the Power of Data Analytics

Throughout the session, Anderson and Maharaj showcased the immense potential of data analytics in improving retirement outcomes for individual members within defined contribution funds. By harnessing data-driven insights, trustees, administrators, and consultants can make informed decisions, optimise member engagement, and work towards achieving a secure and prosperous retirement for all.

Recorded content from ICA2023 - including this session - is available via the Joyn platform. Watch now.