Technology is the key to our financial futures, whether we offer savings products or services to pensions, or are one of the 14 million pensions savers in the UK. We can all benefit from technology, even if we don’t know it yet. But before we can get there, we have two knotty problems to solve. The first is to make it easier for people to save for retirement; the second is to make it possible for providers to operate in the market efficiently and effectively.
We have considerable financial vulnerability in the UK. 60% of adults have savings of less than £5,000. 30% have no private pension and will rely on the State for income when they retire. In today’s terms, that means living on c£8,000 a year, roughly half of what it takes to have a moderate lifestyle. In addition, £400 million pots have ‘lost’ their rightful owners, and around £1 billion might have been scammed from scheme members.
People do not trust the pensions industry and unfortunately, we don’t always do our utmost to change that perception.
It’s not obvious, but pension providers are financially vulnerable too. Inefficiency and high operating costs, coupled with a lack of perceived incentive to invest in the industry leads to an unintentional loss of value for everyone. There are estimates that the UK pensions industry is up to 30% more expensive (or less efficient), than elsewhere in Europe. This will be a major concern post Brexit, as it will affect competitiveness. Many administrators still rely on paper files and manual processing for a few really complex individual cases and sometimes for whole schemes. I am always disappointed when I hear administrators say that it is not cost effective to automate some calculations and processes, and decide instead to wait until a calculation is needed and do it manually. In turn they risk getting it wrong or taking a long time.
Poor quality of data and a dependence on legacy systems cost a fortune to maintain and consumes resources that could be used to optimise the way we do things. We also face an increasing squeeze on margins through charge caps and price competition. Sometimes we respond to that by subtly reducing the services, thereby perpetuating a cycle of low expectations, low trust, low savings, and increasing inefficiency.
We must do things differently and technology will help us get there, but how?
Some providers have already adopted robotics and biometrics for certain processes. Robotics is using a machine to do exactly the same thing as a human, but faster and more consistently. Robotics can help join the dots between clunky legacy systems, giving them a new lease of life, and avoiding significant replacement costs for now. Meanwhile, biometrics can help with member identification and can reduce member hassle with benefit claims. In other industries, artificial intelligence is already replacing roles that demand routine logical decisions, and in financial services machine learning is already helping people with pension decisions and savings nudges. Open banking has laid the groundwork for sharing data and switching providers. A similar concept of ‘open pensions’ could revolutionise the way we transfer and aggregate pension funds at the bulk or individual level.
The pensions dashboard is the biggest opportunity we have to kick-start pensions technology, through add-on apps and platforms, chosen by individuals or schemes, that will allow people to model and explore options and ultimately carry out transactions. Technology will help integrate pensions with mainstream saving and expenditure, and will bring pensions into the sunlight. Financial wellbeing isn’t just about the state of your bank account but must also include pension saving. People need to be able to see their whole financial world at a glance and be able to make sensible decisions without having to pay for a highly skilled and expensive, as well as rare, financial adviser.
People are perfectly capable of making complex decisions and choices if they are able to see clear, unambiguous and focused information at the right time.
Technology that merely replaces human processing will help reduce some costs, but without a quality sea change, will do little to build public trust in pensions. We must address the poor data issue and consider better processing. Dare I say it, we must simplify pension benefits themselves. Simplifying pension benefit bases is a magic bullet that everyone seems to ignore. We say it is too difficult, but this is not true. We tend to equate simplification with loss of value for members. It needn’t be, but the standardisation we see tends to come with PPF entry and this colours our view. We need to think in terms of benefit equivalence and fair value replacement, a concept well practised with incentive exercises, chiefly modifications like PIE ‘balanced deals’. We hide behind statutory increases and GMP equalisation as a block to simplification, but we can significantly simplify today even allowing for statutory barriers.
I see a communications revolution coming. Not just because of the pensions dashboard, which since it was mooted has been a catalyst for change, but also because of initiatives like simplified benefit statements and using video to tell stories about how pension saving helps society, and to explain in very simple language the options and choices at the right time for each individual. This will help make pension saving more meaningful, and I take my hat off to those schemes and consultants who are really thinking outside of the box.
Robotics advice has been slow to take off, with some commentators suggesting it might not always give the right answer. However, we need to realise that millions of people need some help and that help, which does not lie or mislead, is vastly superior to no help at all. With the expected growth in modelling apps and with some hope that future financial guidance will be seen as ‘help’ and not ‘advice’, technology will be able to dispel the mystery and bring pensions alive for most of the population. Roboadvice or some combination of robot and human guidance is part of the technology landscape. DC and DB consolidation will also rely on good technology, but many players are focused on the same old systems, processes and data, just relying on assets under management, and volume processing for efficiency. This misses the point and also misses the tremendous opportunity from technology to solve our issues of inefficiency.
Operational inefficiency needs investment in technology, but we must ensure we make changes that help pension systems (internal and external), to talk to one another and not just go for local solutions in isolation.
We need common data and transfer protocols, standards-based assurance, data integrity, and government leadership to make this happen.
By Margaret Snowdon – PASA