The pension sector can better prepare for the future with scenario planning based on real-option theory!
'Real-option theory combined with scenario planning help to both estimate the critical implementation timeline, and determine when it is interesting to make or not make the IT investments required for this purpose.'- Kees-Jan van Vliet.
'More will change in the pension industry in the coming years than in the past four decades. The most obvious developments are the arrival of changes in legislation and regulations, including the Future of Pensions Act, stricter requirements imposed by society on sustainability, and the many opportunities and risks offered by new technologies. These developments are all happening more or less simultaneously, but the capacity to properly implement all these changes is limited. Scenario planning offers many opportunities to continuously set the right priorities. The advantage of scenario planning is that you can place the developments in time and assess the interaction between them. The disadvantage is that you cannot properly test the different options against each other. Real-option theory can be a solution for this.'
Source of help
'Real-option theory can be a tool for making complex (strategic) decisions. This model comes from the world of strategic management and is used by multinationals in life sciences and resource extraction, among others. Its strength is that you value opportunities and risks by reducing them to a corporate finance model. A multitude of uncertain factors, including technological developments and moves by competitors, make it difficult to keep track of the consequences of possible decisions. By making the opportunities and risks of certain options measurable and monitoring them for a certain period of time within one model, it is possible to come to a better informed (strategic) decision making.'
Example: integration of mobile payment applications in the pension sector
Modern payment system
'In our daily payment system, it is now commonplace to pay using mobile devices via IT companies such as Google Pay and Apple Pay. One possible scenario is that in the future pension data will also be accessed through these types of mobile platforms and possibly participants will even be able to submit personal choices. This raises the question of when the pension industry wants to start making efforts to be prepared for this. Real-option theory combined with scenario planning help to both estimate the critical implementation timeline and determine when it is interesting to make the IT investments required for this or not.
By placing the various developments in scenarios, quantifying them, and then testing them, you can assess them integrally. By making everything measurable, you can continue to monitor and adjust the options objectively over a longer period of time. This integral approach means that you are, as it were, turning one steering wheel instead of several when making well-founded decisions.'
'Real-option theory is an interesting tool for scenario planning. Yet it is not beatific. It is a theory, and in practice, to some extent, it is more of an art than science. So you have to keep using common sense and continuously test whether what you are measuring remains relevant. Furthermore, scenarios must be truly mutually exclusive, otherwise you perceive the impact of certain things to be greater than they really are. You run the risk of creating an artificial world that has little to do with reality.'
Integrating in the organisation
'Boer & Croon can help organizations map scenarios, quantify them, and create an environment in which the options can be tested with some regularity. This gives clients room to focus on making the right decisions. Boer & Croon also supports its clients in integrating this form of resilient scenario planning into their organizations.
The question is who should take the lead in this. Is it the CFO or the head of IT? As a rule, you see the entire board thinking about this based on the CFO's dashboard. This is in line with the function of the modern CFO, who facilitates strategic decision-making in a sustainable way.'