It’s pensions, but not as we know them…
When someone raises the topic of pension planning, for many of us, our response will generally depend on our age.
In our 20s, a pension feels like a distant milestone. In our 30s, we may well be more focussed on buying a house or starting a family. In fact, it may not be until our 40s that the pension question comes sharply into focus. Google’s most frequently asked questions about this subject tend to support this assumption, reflecting not just ‘when should I start my pension?’, but equally frequently, ‘is it too late to start my pension in my 40s… or 50s…or (even) 60s?’.
Wherever you may be on your life journey, just like death and taxes, pensions eventually become increasingly important, but the questions are now not just about when, rather, how to understand the change. This is an industry at a pivotal point of total transformation with the consequences set to reverberate not just for the institutions that provide pension products but for anyone who either has started, or is thinking of starting, a pension. Which is almost the entire adult population of the UK.
Active pension holding citizens have in recent years been hugely encouraged by the state to increase or top-up their pension contributions. Received wisdom is that the state pension won’t be enough: so how are you, as an individual, going to take more responsibility for the size of your pension?
Given the complexities of how pensions are managed through different funds and brokers, unless you’re an expert, taking control of your pension portfolio can be not only confusing but daunting. Can I keep track of the paper work (and it usually always is paper)? Is my pension too volatile? Is the money safe and will it yield sufficient returns?
What’s more, people’s working lives have changed. The likelihood of staying in a single organization or role throughout our careers is now low. This means that as you move from role to role you might pick up several pension pots. Who manages these pots: employers? citizens? expensive financial advisers? the Government?
Pensions need to be demystified and simplified so that individuals can work out what decisions they need to make and how to make them. Without this knowledge, it’s all too tempting to put such decisions off until a later date.
Now let’s examine the industry itself. Under intense market pressures, life and pensions providers are having to harness vast amounts of data to mitigate significant risk as people retire earlier and live longer. At the same time, they are beginning to apply an array of emerging technologies to become more efficient and effective, and more responsive to consumer demands. And that’s before we even get to the myriad products that have sprung up over decades and need to be streamlined and optimized.
Thanks to connected technologies, open banking and FinTech disruption, providers are under pressure to give customers greater visibility and control of their finances. This shift will have a huge impact on the pensions market and we can see this reflected in the concept of the pensions dashboard now being developed by the UK Government.
There is plenty of good news here. People will benefit from greater transparency which along with dashboards should simplify personal pension administration, driving up satisfaction and engagement – while driving down the risk of procrastination and inaction and reducing at a macro level the level of risk for the nation that is associated with a less prepared pensionable population.
The UK Government has already been addressing risk reduction by applying nudge theory; using positive reinforcement rather than obligatory compliance to change people’s behaviors After the 2012 auto enrolment legislation, active membership of UK private sector pension schemes leapt from 2.7 million to 7.7 million in just four years. The UK Government’s approach proved that appropriate use of Nudge Theory in policy design is an effective way to move people to an outcome that they may otherwise have passed over.
And this is important, because when we can see what’s happening and can make informed decisions, we will feel more confident and secure about our future. In turn this could also foster more opportunity and creativity later in our careers. With more people living longer and shifts in work patterns, people can have the chance to do different kinds of work while being clear about both about where they stand with their pension but also to have greater flexibility on how to use it.
It is beholden on the industry and partners to make it easier for citizens to access, manage and understand their pensions. Retirement is no longer simply the end of a working life: it is the start of a new set of choices. Pensions have a huge part to play in enabling people to invest, work, spend time with family, help friends, volunteer, start a new enterprise or even simply to see more of the world. All this and more people will now probably do for an extended period of time. By knowing how best to leverage life and pension plans, people can make positive decisions for what should be an enriching period of their lives.
The world of pensions is changing. When we start our pensions, how many pensions we have, and what we do with them, will mean our retirement and how we manage our journey to it is going to be very different.
Digital Vision for Life & Pensions
This article is part of the Atos UK&I Digital Vision for Life & Pensions opinion paper. We explore the realities of digital transformation for life and pensions companies amidst wider societal change and an increasingly disrupted market.