Pension planning for entrepreneurs: an actuarial perspective

Purpose Having adequate pension coverage for the working people is an aim for achieving the welfare of societies. The labour landscape is experiencing changes, of interest in this paper, is the rise in self-employment and entrepreneurship. Moreover, the world population is ageing, with increased life expectancy. Therefore, there is an expectation of more people transitioning to retirement and living longer, with a growing proportion of those transitioning directly from self-employment or entrepreneurship. A limited volume of studies addresses entrepreneur’s pension planning or take-up. This study examines the potential pension gap and considers it from the point of view of the self-employed, governments and policy makers and actuaries. Our work outlines findings from original data analysis to understand factors that affect the level of pension-related preparedness of entrepreneurs. The paper also considers personality traits that are most associated with entrepreneurs and what they mean in terms of pension planning, design and take-up. Having made several observations from the extracted insight and consider that the pension gap is a significant problem, where the financial impacts to society may materialise within the next decade, if action is not taken by Governments, supported by Actuaries (in public and private space). Given the evolving labour market, we consider that government financial security objectives should be strongly linked to financial inclusion strategies. This paper, therefore, provides a collection of factors that actuaries and Governments may want to consider in arriving at appropriate strategies, designing flexible products and widening distribution and reach to the self-employed population. Design/methodology/approach Our work outlines findings from the analysis of original data (UKHLS – UK) to understand factors that affect the level of pension-related preparedness of entrepreneurs, such as the relationships between entrepreneurship and having pension plans and the size of the business. These relationships are explored by setting four linear probability models and test for two types of pension plans: employer and personal pensions. The paper also considers personality traits that are most associated with entrepreneurs and what they mean in terms of pension planning, design and take-up. Findings The main findings include: an upward trend towards self-employment with a growingly diverse workforce in terms of gender, age and profession. There is a material of pension coverage gap amongst the self-employed where approximately 20% only of that population have pension plans compared to approximately 80% of the employed population. A positive relationship is detected between personal pension and entrepreneurship where as it is negative with the employer pension. The larger the size of the business the more likely that an employer pension scheme is used. Personality traits affect the behaviour of entrepreneurs towards having pension plans. Research limitations/implications Considering the UK pension environment as an example in understanding the pension gap for the self-employed. Thus, the results obtained are according to the data used from the British database (UKHLS – UK). Other variables may affect the relationships under study, such as the age, gender, the education and financial assessment. Future research may wish to consider in greater detail the impact of these variables. Practical implications Government financial security objectives should be strongly linked to financial inclusivity to ensure appropriate pension coverage in old age and reduce the likelihood of financial strain to the state of retirement poverty. Financial inclusivity measures may require improved financial literacy initiatives. Actuaries can play a vital role in raising awareness and financial literacy by articulating the risks of income uncertainty in retirement. Actuaries can also be involved in designing and modelling products for better reach considering the factors and personality traits of entrepreneurs mentioned in this research and formulating the appropriate risk-based messages to increase the likelihood of pension takeup. Originality/value Coverage for the self-employed in social insurance systems and access to private pension arrangements varies across countries. Also, there isn’t a sufficient volume of research on pension take-up or retirement financial resources amongst the self-employed or entrepreneurial population. As it has been depicted in the literature that entrepreneurs are poor pension planners, this paper consolidates several literary, market and analysis insights into this matter to address the identified pension gap from different angles: self-employed or entrepreneurs – Governments and decision-makers – actuaries. Taking into consideration the analysis of important factors and personality traits that affect the pension planning.