In parallel, deferred late-life annuities can be purchased at retirement to obtain protection against tail longevity risk.
More generally, goal-based investing principles can be used to effectively address the retirement investing problem by allowing investors in transition (say from age 55 to 65) to secure minimum levels of replacement income for a fixed period of time (say 20 years) in retirement.
This should generate the kind of upside needed to reach target levels of replacement income with attractive probabilities.
It is only recently that the emergence of the goal-based investing paradigm has effectively allowed for the development of such mass-customised investment solutions to individuals.
As an example of the framework in application, Edhec-Risk Institute and the Princeton University Operations Research and Financial Engineering (ORFE) Department have teamed up to launch the Edhec-Princeton Goal Based Investing Index series.
These indices are based on joint academic research conducted with the support of Merrill Lynch Wealth Management on the application of goal-based investing (GBI) principles to the retirement problem.
Mass customisation is facilitated by the convergence of powerful forces. On the one hand, production costs are strongly reduced due to the emergence of smart factor indices as efficient alternatives to active managers for risk premia harvesting.
On the other hand, distribution costs are also bound to go down as the trend towards disintermediation is accelerating through the development of FinTech and robo-adviser initiatives.
Beyond these new trends, and given the low general level of financial literacy and inertia in individual investment decisions, meaningful and cost-efficient retirement default options should be offered and delivered without the need for costly advisory channels.
The investment industry has a unique opportunity to add value to society as a whole by contributing to the needed answer to the looming pension crisis.
It is often argued that impact investing will allow us to generate positive social benefits and even eventually help us stop global warming and climate change.
I would argue that before embarking on an ambitious journey to help the world deal with the climate crisis, the investment industry should first make sure it serves the people by helping individuals deal with the pension crisis adequately addressing the needs of its clients, and most importantly their retirement needs.
Professor Lionel Martellini is a director of Edhec's Risk Institute