From Open Banking, to Open Pensions?
From Open Banking, to Open Pensions?
Time was when a pension was something you had, not something you did. We all know how it used to work: every month you’d put a portion of your pay packet into an employer-administered pension; then at 65 — along with your carriage clock — you received a guaranteed monthly income for the rest of your life.
These defined benefit (DB) schemes were easy, requiring zero effort on employees’ part; what’s more, they occasioned little anxiety since your employer took the hit from underperforming investments. But over the last 40 years, the gold-plated pension pot has become increasingly rare, replaced by defined contribution (DC) schemes where the responsibility for saving — and making investment choices — shifted to the individual worker.
The withering away of DB schemes has been shadowed by the death of the “job for life”, the average person now having 11 roles across their lifetime. The result is that where pensions were once supremely simple, the average worker today is accruing a cat’s cradle of different pensions; for many, this includes both DB and DC pots. Anyone contemplating retirement and faced with this sort of complexity could well be forgiven for going a bit Roger Daltrey.
But pensions are changing, and what was once the sleepy backwater of financial services is set for a digital revolution. And, as with so many digital transformation initiatives, it all begins with a dashboard.
Pensions dashboards: dash is king?
The digital revolution that has transformed so many aspects of financial services has almost entirely passed by the pensions industry. Research by Aviva last year found that over half of middle-aged people have never calculated when they can afford to retire. In fact, twice as many people use dieting apps as use apps for retirement planning.
Last month however saw a major step in pensions’ evolution with the passing of the Pensions Scheme Act which, among other provisions, paves the way for the introduction of collective defined contribution (CDC) schemes and pensions dashboards.
These pensions dashboards are designed to resolve the byzantine complexity of multiple, untracked pensions pots. This is becoming a serious problem: research by the Association of British Insurers (ABI) found that there are 1.6 million unclaimed pension pots, worth almost £20 billion — around £13,000 each — that owners who have lost track of or forgotten about entirely.
These dashboards will be a central source that enables everyone to keep track of all their schemes, including the State Pension, and are being created by the Pensions Dashboards Programme (PDP), the organisation set up by the Money and Pensions Service (MaPS) to design implement the underlying ecosystem.
“At the moment it’s very difficult to get an holistic view on what your income in retirement will be,” explained Anthony Rafferty, CEO of Origo, a UK fintech closely involved in the development of pensions dashboards. “Dashboards are the best catalyst we’ve got to get people to engage with their financial future. Think of the 30-year-old who can look at their dashboard, see how much is in their pot, and calculate what income they’ll generate. If they don’t like the figure, they can do something about it.
“Or consider the 50-year-old who’s beginning to think about retirement. Without a single, unifying dashboard, the only way to understand your financial situation is to request statements from every one of your providers, including long-forgotten pots from jobs you did decades ago. But we’re on the right track: the procurement for dashboards is beginning, and should see an alpha by the end of the year.”
Pensions dashboards will be nothing short of transformative, said Nick Caley, VP UK & Ireland at ForgeRock. “In 2020 we saw an historic offline-to-online global shift and with it, a more empowering view of personal data is emerging between companies and consumers,” said Caley.
“Regulatory innovations like the Pensions Scheme Act in the UK is codifying this new worldview into law, giving consumers access and control of their records and making that interoperable across multiple providers. In the case of pensions dashboards, this means empowering consumers to make better financial decisions and manage their data with different providers as they see fit.”
While no one doubts dashboards will cut the Gordian Knot of multiple, overlapping pension pots, such an inherently complex project with so many stakeholders will naturally bump up against problems. Last October, for example, it was announced that dashboards would not be available to retirement savers until 2023, with the complexities of data sharing between so many providers being the key sticking point.
MaPS told The Stack that it was too early to comment on the technology behind the dashboards, but it’s clear that progress towards their implementation has been less than smooth.
The delay is hardly surprising, according to Rob Yuille, Assistant Director and Head of Long-term Savings Policy at the ABI. “Pensions are not like ordinary savings; they are an instrument of public policy,” said Yuille. “We’re talking about a highly policy- and regulation-focused area that’s tightly integrated with the rest of the economy. Remember, people enrolled in a pensions scheme today might still be receiving payments in 70 years’ time. If progress is slow, that’s very much the nature of pensions.”
Pensions are getting smarter...
While dashboards remain on the horizon for the time being, there’s a common perception that the pensions industry is laggardly in its adoption of technology.
“The pensions industry has made significant technological advances in the last few years, but we’re still talking about some very old products,” said Rafferty. “For example, one provider still runs a scheme called Life70, named because it was developed in 1970.
“The stakes could not be higher,” he continued. “Aviva recently published research on retirement incomes and found that the average person is on track to receive just over £180 a week, and that includes the state pension. Getting more people engaged in their retirement savings is critical, not just for the industry but for the country.”
The pensions industry is well aware of this challenge, and accusations of technological backwardness are unfair, says Gareth Strange, Senior Pensions Adviser at Willis Towers Watson.
“Pensions technology has developed a great deal in the last ten years" - Gareth Strange, Willis Towers Watson
“Pensions technology has developed a great deal in the last ten years, reflecting how ordinary consumers are used to managing other aspects of their financial affairs,” said Strange. “If you look at the big DC schemes that provide the vast majority of pensions to the under-40s, we’re seeing great applications such as easy asset switching, retirement income calculators, and ‘age-ometers’ that help you track when you can comfortably retire.
“But we’re also seeing change in DB schemes. If you look at the larger ones, you see more engagement tools, more ability to login and change personal information and beneficiaries, or do calculations.”
While this might seem fairly basic compared to the functionalities provided by the latest money management or investment apps, this represents a step change from just a few years ago. Previously, you’d have needed to engage in a lengthy correspondence with the pension administrator to make even the most minor change. And although these push-button services are currently the preserve of the larger DB schemes, Strange expects that consolidation within the industry will make these technologies standard before long.
Chris Connelly, Propositions and Solutions Director at Equiniti was also keen to dispel the idea that the pension industry has been resistant to technological change. “You don’t have to look far to find examples of pensions moving with the times,” he told us. “You have digital and mobile access, of course, but we’ve also seen some deployment of blockchain and a much better understanding of how to manage the huge pools of data now available.
“But for me, the biggest change is in how the industry is meeting people’s changing needs. The imperative of technology rollout has changed markedly in the last ten years. We’ve seen older DB schemes become increasingly unaffordable to businesses, with some schemes bigger than the companies they leave behind. The switch to DC has required schemes to engage with consumers, and the industry has been able to deploy engagement and management technologies that have been proven in other areas of financial services.”
It’s clearly unfair to accuse the industry of neglecting new digital technology, but this doesn’t necessarily make the introduction of dashboards or other technologies plain sailing. We’ve already seen how dashboards have been delayed until 2023 at the earliest. To understand why, we need to take a look at the complications the industry is wrestling with, and how technology providers are rising to meet the challenge.
...but data is difficult
The industry certainly can’t be accused of lacking ambition.
But the task of pulling together so many different pension pots and making them accessible poses an eye-watering data integration challenge, as Yuille explains: “Dashboards is a great example of a cross-industry project to transform consumer engagement in pensions to help solve several policy problems including multiple, fragmented pension pots,” said Yuille. “Ultimately, we want people to make more informed decisions about access, transferring and finding savings they never knew they had. Doing that requires consumers’ consent, common data standards, and for all the disparate parts of the industry to do the same thing in the same format - and often involving decades-old data.”
The picture is further complicated by the fact that different pensions are regulated in different ways with, broadly speaking, occupational pensions regulated by the Department for Work and Pensions (DWP), while personal pensions come under the purview of the Financial Conduct Authority (FCA). This is why the Pensions Scheme Act marks such a significant landmark in the journey towards dashboards, since it compels providers to make consumers’ data available.
“There is a widely held view in the industry that data has to be comprehensive, encompassing the full range of DB, DC and State pensions,” explained Yuille. “The government is keen to emphasise that we’re talking about multiple, different dashboards, not a single universal platform. In a similar way to Open Banking, people should be able to access trusted data via third party. But precisely what this looks like is still unclear, although obviously as a regulated activity it will fall under FCA rules. The ABI is committed to exploring the wider use cases with all stakeholders.”
"Most of this is a matter of plumbing: sorting out the infrastructure between the different parts of the industry and moving away from manual and paper-based processes" - Rob Yuille, ABI
Data accuracy, identity verification, consent management and security are all issues affecting the implementation of pensions dashboards. As Nick Caley notes, “The readiness and technical capability of retail banks to deliver Open Banking delayed the rollout of that scheme; the same issues look likely to be at play with the pensions dashboard.
“Because of this, the PDP has planned a multi-stage roll-out including development, testing, onboarding and deployment,” Caley continued. “This year we will see the development and initial testing of the digital architecture of dashboards, followed by real-world testing with volunteer providers in 2022. In 2023, providers will be required by law to connect to dashboards.”
It will be particularly interesting to see how the industry secures the necessary permissions from customers. This is a particularly thorny issue for the pension industry, which has faced criticism in the past for selling consumer data on to third parties. Clearly, one of the biggest challenges is how to use this data legally while ensuring it’s structured so that regulated third parties can subscribe and access it in a usable format. And this will be as much a communications challenge as a technical one.
Anthony Rafferty however believes that the difficulties of data have been overstated. “Data standards have only just been defined, and there has been nothing to stop pension providers improving the quality of their data, within GDPR, over the last two years. And thanks to agile delivery, this will just keep getting better and better.”
Rafferty pointed to the problem of having to work with multiple systems such as cash flow analysis, risk tools, and customers’ transaction history. But where today financial advisers might have to deal with 50 firms’ processes, Origo and other fintechs will enable them to access this data and all these disparate tools in a single hub.
Improving the plumbing
Although no one underestimates the scale of the task, at least the industry doesn’t have to start from scratch. Many of the technologies needed to make dashboards and value added services are already in use in other areas of financial services: “Dashboards arose out of necessity, but firms have been making it easier to access pension information for many years,” said Yuille. “In the last ten years or so, we’ve seen the growth in investment platforms where anyone can invest across pensions, ISAs and other products. They can access information, switch investments, and trade shares easily, including in apps. These platforms already hold hundreds of billions of pounds, so it’s not like pensions will need to break much new ground.
“More recently, we have seen the rise of digital wealth managers or ‘robo-advisers’ which make investing more accessible to ordinary people. Dashboards need to be seen in this context, moving in the same direction as other financial services to bring these benefits to all and make planning for your retirement as easy as possible. Most of this is a matter of plumbing: sorting out the infrastructure between the different parts of the industry and moving away from manual and paper-based processes.”
Dashboards and other innovations will clearly also bring benefits to providers themselves. Earlier, Rob Yuille discussed the importance of enhanced customer engagement, given that ordinary people are now in charge of investing their pensions pot.
Chris Connelly believes that this will enable pensions providers to create a range of more tailored services, representing a valuable new revenue stream: “There’s a whole generation enrolled in a pensions scheme without realising that they have control over their investment,” said Connelly. “And probably only five to ten per cent of those people are making a conscious, active investment choice over where they invest.
"One possibility is automated triaging, with full-on automation to select customers and steer them towards the advice that’s right for their needs” - Chris Connelly, Equiniti
“Pensions providers don’t just make money on selling policies; they also earn money on the assets contained within them. So not only is there an incentive to advise on investment choices to customers, there’s also a need. Many people will have built up healthy savings, but won’t necessarily be well-equipped to make the right decision on investment. This creates a new middle market of people that IFAs wouldn’t usually consider. Not only will technology create these new opportunities; it will support them too.
“One possibility is automated triaging, with full-on automation to select customers and steer them towards the advice that’s right for their needs.”
Another consideration is ethical investing. People are increasingly aware of the environmental and social impact of their behaviour, and pensions are no different. Rob Yuille points out that most people are unaware that their pension is invested at all - they assume that some form of savings account, with no conception of how your pension should grow over time.
“But when they do become aware, they tend to have very strong views about where they want their money invested,” says Yuille. “That’s going to be a significant challenge to the industry: engaging customers with these issues, making them aware where their money is, and acting upon their wishes. In this new era of consumer choice and control, pensions providers are going to have to offer default investments that yield good returns, taking account of environmental and social risks, as well as giving people the chance to exercise an ethical choice for themselves.”
While there is clearly a lot of work to do before pensions shed their reputation as the staid, defiantly-dull backwater of financial services, hope lives that a combination of legislative push and technological pull might yet - perish the thought - help it become one of the most dynamic and exhilarating sectors out there.
