The pensions sector is notorious for its product focus and complexity. Legislation and regulation have driven this, but the market is product-centric rather than consumer-focused as a result. Not only does complexity deter consumers from engaging with their retirement needs, but it also creates the big divide between pre and post-retirement services. In practice, consumers interact very little with pension providers - transactions are few and far between and it is little surprise that pre-retirement planning communications are called ‘wake-up’ packs.
In the UK, around 450,000 employees per annum will retire. More than half will only have access to guidance via the employer; 150,000 could look to their auto-enrolment provider and 70,000 (15 percent) may have some support from their employer’s pension plan provider. Couple the lack of capacity to provide guidance and regulated financial advice with a disengaged population, and the conditions for financial self-harm and scamming are apparent.
To make pensions more relevant and engaging, some technology-backed solutions are emerging. Personalisation and improved interaction are at the heart of these:
- Pension trackers and dashboards: These enable consumers to get a single view of their pension pots and to benchmark the value for money that they provide. Government and commercial dashboards aggregating pension pots are still under development, but pension tracing is a key feature. The Association of British Insurers estimates that consumers have lost touch with 1.6 million pension pots worth over £19 billion. Clearly, discovery is the first step in retirement planning.
- Tax guidance: Tax is at the heart of pensions complexity but support for consumers is patchy – even for those using accountants. With more than 1.5 million people on target to exceed the lifetime allowance (LTA) on pension savings, and 1.75 million workers potentially missing out on around £60million each year in pension tax relief, this must be an opportunity. In addition, half of the pension pots accessed already have been fully withdrawn often resulting in tax charges.
- A financial coach in your pocket: Budgeting tools and data aggregation services are gaining ground thanks to Open Banking developments. Some of these tools include AI nudges, such as Money Hub Enterprise, linking daily spending and saving to investments and longer-term decumulation management.
- Ecosystems of retirement provision: Wellbeing programmes and digital platforms could link pensions, healthcare, equity release, legal, tax, social connectors, links to charities etc. into a managed lifetime service. A robust end-to-end proposition has yet to appear.
- New communication media: Examples include the development of video-based pension statements; conversational chatbots and voice-based interaction. Merrill Lynch’s Edge app visibly aged users on screen to confront users with the need to plan. Even more immersive technologies could be used including Virtual Reality to time travel consumers through their financial futures.
- Medical apps harnessing IoT: Healthcare monitoring and alerts could be linked to the provision of services, including a pathway to using enhanced annuities based on reduced life expectancy.
- One-stop support: Helping people not achieve an income but supporting their daily activities in retirement, from online help groups, retail offers, and assistance programmes normally confined to employees.
The current post-Freedoms free-for-all may move towards new pooled solutions and auto pilot decumulation, especially for those with small pension pots and limited other assets. But improved guidance and advice tools will still be needed within new customer-centric service design solutions. That requires digital technology, big data and analytics solutions, and more creativity around how to apply them.
Most of these opportunities for greater personalisation and engagement leverage developments in technology and analytics as a result. In the process, they enable a shift from traditional financial product management silos to wider customer-centric service design solutions.
It seems inevitable that the current post-Freedoms free-for-all to create adequate retirement income will move towards new pooled solutions and forms of auto-pilot decumulation, especially for those with small pension pots, limited other assets, and no access to advice. Even if product design and default guidance can better cater for many, customers with complex issues and greater wealth will require more personalised, sophisticated, and ongoing support which retirement service providers need to move towards rather than waiting for Government and regulators to design propositions and customer experiences for them. Principle-based regulation focused on customer outcomes is likely to dominate, especially in a post-Brexit environment, encouraging innovation and opportunity to become a dominant in-retirement player.
Click here to read part one in the series.
This blog was co-authored by:
Vaughan has worked in senior roles in pension providers and consulting firms, often with a focus on the changing international retirement markets. Clients have included financial regulators, guidance bodies and technology firms as well as financial institutions. He is a member of the UK’s Financial Capability Strategy Advisory Board and he has published a number of articles on fintech, workplace marketing, and data privacy.