Growing Importance of Wealth and Pension Planning

Sibylle Fischer October 17, 2024 Innovation, Digitalisation

Global trends and influences, especially around technology innovation, are set to reshape wealth and pension planning.

The Great Wealth Transfer is coming

Over the course of the next decade, an estimated $85 trillion in assets are expected to be transferred from the Silent Generation and Baby Boomers to their GenX and Millennial heirs. This historic wealth transfer will have big impacts for the markets, though the specifics will depend largely on how those heirs decide to invest. Traditional investing options like stocks, real estate and bonds may be less appealing to younger investors who are more open to alternative asset classes, looking for greater growth opportunities, or prioritizing sustainable or impact investing.

Environmental, Social, and Governance (ESG) matters

Gen X, millennials and even younger Gen Z investors are increasingly making investment choices based on values-driven investment options. The Great Wealth Transfer coupled with this generational interest in ESG investing is likely to have a huge impact on financial markets and the wealth planning industry in general. Already, wealth management firms are working to integrate ESG considerations into the investment lifecycle - looking closely at climate change factors, stranded assets, natural resources issues, climate tech, green building, renewable energy, DEI issues, labour standards, business ethics, tax transparency and more.

Decline in traditional pensions

The way we fund retirements has changed drastically over the last several decades. In the US, the overwhelming decline in defined benefit pension plans, which extend retirement benefits to employees, have been largely replaced by defined contribution plans, like 401ks. Current estimates show only about 14% of private sector workers in the US have access to pensions. And in the EU, ageing populations are increasing the pressure to reform many of its member pension systems. Germany is projecting that by 2050 there will be only one pensioner for every two of its workers, with ratios on the rise. In Switzerland, pension reforms are underway, including a recent increase in the retirement (or reference) age. New insurance products like longevity risk protect against the very real (and relatively new) problem of outlasting your retirement savings. And hybrid pension plans seek to balance the stability of defined benefit plans with the flexibility of a defined contribution plan.

The move toward digital wealth management

In addition to the general increase in demand for digital services thanks to changing customer preferences, AI and automation are poised to play an outsize role in improving and streamlining many wealth management processes considered to be time-consuming, costly and overly manual (e.g. portfolio management, transaction monitoring, compliance checks, reporting, tax optimization, rebalancing and more).

In both wealth management and insurance, AI is being used to help professionals focus more on strategy and personalised client care by automating routine tasks, improving accuracy, and providing data-driven insights. And with a third of the industry's advisors set to retire over the course of the next decade, that means an estimated 40% of the industry's client assets will soon be up for grabs. As a result, digital platforms and robo-advisors will rise in prominence to manage a larger piece of the asset pie - supporting human wealth managers to address the needs of a customer-base that largely prefers digital interactions and service models.

Close to home, Baloise FX, a cooperation between Google and Baloise, is already using genAI to simplify and optimise the work of financial planners. In our hybrid model, Baloise's financial planners work closely with the AI-powered system, monitoring its AI-generated reports for accuracy through a dashboard. Baloise FX is still in its testing phase, but a live launch for customers is planned for 2025. Matthäus Beer, Head Life Insurance Solutions Private Clients at Baloise, sees retaining the human factor as a crucial element in the success of such AI initiatives, explaining, "The chain-of-thought will always be driven by financial planners, but AI has the potential to align and extend our reasoning towards clients."

As data analytics continue to improve and more AI-driven financial products and investment options become available, the demand for personalised or bespoke strategies are also expected to increase. These hyper-personalised, digitally-powered wealth management services will take into consideration a wide range of factors specific to a client's preferences, like: biometrics, habits, insurance needs, resources and more.

Regulatory changes also coming

Big data analytics can be used to proactively and precisely anticipate changing market conditions alongside the needs of clients. However, big data also invokes privacy concerns around data governance. This will be a serious priority for wealth managers as they work to balance industry innovation with tightening standards around personal and financial information. New tax policies (especially around retirement savings) and more efficient tax planning within wealth management are likely to become more and more important as clients work to hold onto their wealth for longer. At the same time, changing financial regulations will continue to influence the ways both pensions and wealth are managed. RegTech innovations will likely be implemented over time to help financial institutions comply with these complex requirements.

Bottom line: technology will help transform the pension and wealth planning space

Technological advancements will be central to navigating the evolution of pension and wealth planning alongside insurance. Financial services will grow more flexible, personal and precise, creating true efficiencies in the industry as it pivots to better address the financial security concerns of future generations.