The pension industry is facing tough challenges. People are living longer and have more potential retirement years to finance. Traditional defined benefit pensions, with their guaranteed pay-outs but precarious financing, have largely disappeared, replaced by defined contribution schemes that put the onus back onto the consumer. Finding a pension scheme that is sustainable and creates a decent income is increasingly difficult, with interest and annuity rates seeing all-time lows. And with the demise of the ‘job for life’, pensions have become increasingly fragmented, with many people losing track of pots from workplaces they may have only stayed at for a couple of years, or even a couple of months.
Add to this the human behavioural quirks which means many of us put off ‘boring’ actions with long-term benefits – like sorting out pensions – in favour of short-term gratification and no wonder it’s so difficult to get people to engage with their pensions. But to say it’s important is an understatement. In the UK, the state pension is meagre, other benefits are means-tested and people over 65 suffer the worst poverty rates in Western Europe. Pension providers need to do everything they can to try and help future generations of retirees avoid the same fate.
Digital innovation can’t solve the fundamental pension problems of low interest rates, inadequate state pensions and our aging population, but it can help create a more engaged audience, create new products and arm consumers with the knowledge they need to properly plan for their retirement. Stymied by outdated systems, a perceived lack of demand and the need for resources to be funnelled toward dealing with regulation changes, it’s not surprising that the pensions industry hasn’t been at the forefront of innovation thus far. Now things need to change.
Demand for digital services from the retirees of past decades may have been low, but this is no longer the case. Increasingly, all age groups expect seamless, personalised, multi-channel experiences in every area of our lives, and why should pensions be any different. 65% of employers believe that current pension providers are not doing enough to offer new, progressive products and 63% would like to see a new disrupter or challenger move into the pension provider space. New ways need to be found to encourage people to start earlier, save more and not make costly mistakes that will have them holidaying in Bogner rather than Barbados when they reach their golden years.
Solving the advice gap
According to two surveys carried out by MaPS in 2018 and 2019, 55% of working age adults do not feel that they understand enough about pensions to make decisions about saving for retirement. And in 2020 the Financial Conduct Authority stated that pension freedoms introduced by the government in 2015 and the shift to defined contribution schemes had led to ‘significant harm’ to pension investors, with some making poor decisions on complex investments and others being scammed out of their savings. People nearing retirement need good advice so they don’t make mistakes that could cost them dear, especially when there’s the temptation to heavily ‘draw down’ a pension for a comfortable few years, which may leave individuals with nothing in the pot for the remainder of their time.
Then there are all the youngsters who have busy lives and who can barely think about next week, let alone how they’ll be living in 30- or 40-years’ time. Whatever the age group, getting pensions advice can be offputtingly costly. The pensions industry needs to make more use of digital channels and digital technologies such as AI and machine learning to find new ways of helping customers make better decisions, whether through low-cost, high-quality advice or hyper-personalised guidance that is a million miles from the ‘one size fits all’ information provided by most pension providers today. And it’s already starting to happen; Aon’s ‘Well One Money’ financial management platform will have options for pension savers to get full regulated financial advice ‘in the low hundreds of pounds’ according to Senior partner and Head of DC Consulting Ben Roe.
Seeing the future
For those for whom retirement is decades off, immersing themselves in what the future might look like – literally – is one way of getting them to engage. Back in 2013 research by Hal Hershfield showed that people literally think differently about long-term gains over short-term ones when they’re shown images of their ‘future selves’, i.e., digitally aged by several decades. Scottish Widows are now using this technique to encourage people to think about their pension.
Meanwhile a Legal & General pilot for Sainsburys and other retailers involves employees donning a VR headset to show them how their savings will influence their retirement. They go on a journey through holidays to Brighton, the Med and scuba-diving, showing them the results of low, medium, and higher contribution savings strategies.
Nudging people towards saving more
Behavioural nudges made at the right time can encourage people to put more into their pensions and make better decisions. For example, when an employee gets a payrise it’s the perfect time to suggest they raise their contributions and show them what kind of difference it might make to their future life.
Research by Scottish Widows showed that just changing the word ‘save’ to ‘invest’, the amount that young people thought that a hypothetical person should save went up by 34%. Concrete examples like ‘a 12% contribution would keep you above the poverty line’ and ‘a 15% contribution would allow for a comfortable retirement’, led to twice as many young people recommending increasing pension contributions from the default minimum of 8% to 15%. Other useful nudges might include giving examples of behavioural norms (‘Your current contributions of xx% are below the average of %xx for someone on your salary’.
Getting a holistic view of savings
Scottish Widows, Mercer Master Trust, True Potential and SEI are already using open banking technologies to enable customers to get the full picture of their finances, including pensions. For example, customers who bank with Lloyds and have Scottish Widows workplace pensions can see all their information side by side in one app. Spending is sorted into categories, so customers can gain a better understanding of where their money is going and how they could put more into their pensions. SEI joined forces with open finance platform MoneyHub so that customers can connect all their bank accounts and savings together with their pensions. Customers then receive ‘nudges’ suggesting for instance, putting extra savings into their pension pot. Drawdown investors can also fix a level to ‘top up’ their bank account from the pension, so that if they spend less, they can keep more in money in their pension where it’s most tax efficient. A further 19% of providers are planning to implement open banking technology by the end of 2021.
In 2023 the pensions dashboard initiative will start rolling out, meaning consumers will be able to see all their pension savings in a centralised non-commercial hub orchestrated by The Money and Pensions Service. The aim is to enable people to make better retirement decisions. Further down the line it will allow them to compare different products and find better deals more easily, encouraging innovation and increasing competition. It may also become part of a larger ecosystem enabled by open banking, where consumers can see the whole picture of their financial behaviour.
New products made possible by new capabilities
Nine out of ten people keep their pension in the default option of their pension fund. It offers a one-size-fits-all strategy, but what if that default could be uniquely customised to their needs and behavioural traits? That is the thinking behind intelligent default funds which will use information gleaned from open banking to create hyper-personalised default products for individuals who may have very different attitudes to spending and saving but don’t want to spend a lot of time understanding the complex investment landscape.
Products that provide a clearer link between equity release and pension income might also prove attractive to retirees, given that many older people in the UK have a lot of capital tied up in property. particularly those without children or other dependents who are less concerned about leaving a legacy.
The UK’s pensions conundrum is going to have to be tackled from many different angles, but tackled it needs to be. Pension providers and digital experts need to join forces, combining innovation and new technologies with insights from behavioural science to build new products and experiences. This is one area where we can generate a real, positive difference to people’s financial wellbeing – and we all owe it to our future selves to make that happen.
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