The pension reforms announced as part of the Chancellor’s Autumn Statement last month mark an important step for the UK’s pensions sector to enter into the modern era.
Although there is some concern about how the planned consultations will run in tandem with pensions dashboards going live (along with other regulations and initiative changes), in my view, they are long overdue as the current system isn’t delivering for the majority of UK savers or even, I’d argue, providers.
Currently, it’s no shock to say that the UK’s pensions industry often suffers from a lack of joined-up thinking. This isn’t surprising given its 100+ year history and all the legacy issues that come with maintaining, upgrading and modernising something which has historically relied on paper-based processing. But, as an industry, we can’t just keep kicking the proverbial can down the road. We all know – we can, and should, do better.
Take pension transfers as an example – something which I’ve grappled with a number of times in the past myself. Currently, the process of transferring over from one provider to another can take anywhere between weeks or even months and is too often a complicated and hugely drawn-out process.
Ultimately, this is the savers’ money and having to wait this long to access your savings – even if they are wrapped up in a pension – just isn’t good enough. To make matters worse, it can put savers off from engaging with their pensions because they simply don’t have the time, energy or understanding of how to do it.
In the age of open finance, where customers are increasingly demanding connected and seamless digital experiences, this simply must change – pensions are too important to ignore. Moreover, technology has moved on in the past decade so these challenges can be easily overcome with the right investment.
Whilst Origo and Altus have made some progress in ironing this out, I’d argue that the industry is failing to the point of needing an ‘intervention’ – the existing services only work part of the process, and much of the work prior to inputting this transfer onto the system is incredibly manual. Even banks have got to a point where you can switch accounts within a week – and anti-fraud measures are built-in – pensions are not that special! It needs industry and regulators to come together and create an end-to-end digital network to control and effect the transfers. Paper letters and cheques have to come to an end.
Thankfully, dashboards will address some of these issues and are a giant leap in the right direction. But they are just the first cog in the pensions machine of the future. There is still plenty more to be done to avoid the UK sleepwalking into a potential pensions crisis, fuelled by a lack of engagement and all the societal and economic issues it would bring. We must not be distracted by the idea that we can only do one thing at a time as an industry (or indeed by saying ‘it’s too hard’ or ‘we couldn’t possibly’) – what we need is a roadmap of development, and to extend the purpose of the dashboards API and infrastructure to deliver a pension system fit for the 21st century (despite being a quarter of the way through it!).
A pot for life
As an Australian-headquartered fintech provider, we have long been championing some of the virtues of the Aussie superannuation model. More recently, we’ve had the opportunity to assist the Aware Super with their recent re-platforming and seen all the benefits this brings to savers and providers.
The superannuation system is by no means perfect and there are areas where the UK outperforms Australia, such as retirement income options, fees, and governance. But, a string of successive legislation changes – most recently upping the employer contribution to 11% as of July 2023 – has meant Australia has made great strides in getting savers more engaged with their pensions, ultimately helping them to build up bigger pots and live more comfortably in retirement.
Culture plays a big part of engagement, but I’d argue technology is the key facilitator here. Having the ability to easily transfer and consolidate (where it makes sense), access digital advice and other educational tools to help drive understanding and awareness are obvious ways that tech can help – and a ‘pot for life’ is a starting gun to set the UK off on its journey to modernise.
I would argue that ‘pot for life’ is probably the wrong moniker for this, as I don’t think that is quite what the UK needs, or the government or industry want; rather it should be that an individual can choose a provider for DC (or indeed CDC in the future) that fits their needs (and indeed change provider if that provider no longer fits their needs). Let’s call this ‘right to choose’. If you haven’t made a choice, then you default to your employer’s choice of provider.
From a provider’s perspective, a pot for life is likely to rock their world as it is a huge departure from the existing model, where the individuals will become the ‘buyers’ of each pension opened (vs the employers now). This will give the savers more power to choose their providers and potentially vote with their feet if they don’t receive a good level of service or returns.
This may mean underperforming providers could face massive outflows. Those schemes or providers who have long been in the industry and failed to properly invest or have delivered poor value and service for years will be the ones mostly likely to fear for their futures.
From a consumer point of view, exercising their ‘right to choose’ (pot for life) gives them more control over their savings – whilst encouraging greater competition. That on its own would be a huge catalyst to modernise and open the market to new and innovative entrants. Then there’s the whole other issue with tackling the small pots, and a pot for life model could be the solution to that too. I really love the idea that a consumer can choose a provider that ‘talks their language’ – comms are too confusing in our industry, so understanding and engagement that fit the consumer (hyperpersonalised) is going to be super-important in this new world.
As with any change, the current consultation will need to work hard to identify drawbacks and potential pitfalls to ensure the right protections are put in place to create the best outcomes for both savers and society overall, but the key thing here is that it will put the consumer in total control of their pensions, simplify peoples’ finances and mean that our industry has to modernise, digitise and open up our walls to be able to communicate between providers.
Looking at the tech required – again, this isn’t unproven or rocket-science; we have had payment mechanisms and clearing houses for years, and given potentials for improved money movements, open banking could be a way to drive the payments to the right providers from employers. There are a great many options here, and we already have the building blocks. For those that complain that employers will need to reimplement interfaces – well, yes, but only once, and their payroll/HR systems will be able to do this by default – so no more provider-specific interfaces; we standardise and automate. Think about the payroll changes when RTI came in; now this is a periodic update and rolls across all employers and payrolls, simple.
Dashboards are right around the corner – make sure you’re not asleep at the wheel!
The current reset will not last forever and all the noise coming from the Pensions Dashboards Programme (PDP), PASA and the Regulators means I expect it to return at full speed next year.
The ecosystem that dashboards are creating will provide a framework and blueprint for how it could be adapted and enlarged to deal with many other well-documented issues in pensions. So, it’s important that we don’t look at dashboards, pot for life, transfers, small pots, or other existing snags in pure isolation. They are all interlinked and vital to modernising pensions at large – I urge all involved at government and regulator levels not to be shortsighted here.
Of course, some of the detail around the proposed reforms may change once the consultation starts – especially if a new political party comes to power after next year’s General Election. Regardless, if executed correctly, reforms like the pot for life should make pensions simpler, more efficient and increase value.
Such sea change for pensions in the UK will require wide collaboration of all involved. The pensions industry will have to lean on specialists to deliver the detail of ‘the how,’ whilst concentrating on creating cutting-edge frameworks, guardrails and safeguards of all sorts to ensure pensions actually work for everyday savers. This is where the industry can become more than the sum of its often-disparate parts. In particular tech firms such as Bravura must play a vital role in helping design the future as we understand the best ways to digitise and automate and by definition we are change-makers – we can’t simply reinvent manual processes in a digital form.
These changes have been a long time coming and, whilst we are only at the start of the journey, it’s one I’m immensely excited by. Now this is the opportunity to challenge long-held processes to reimagine pensions and deliver more value and understanding to everyday savers who need help now more than ever.
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