Consumers delay planning for retirement until far too late. Even if they are prepared, they often have trouble tracking their retirement funds. What is pensiontech and how can it help?
Most Europeans delay planning for retirement, meaning that they often have to work longer to pay off their mortgages and save enough money to live on. This is risky for households, and problematic for society, which faces the rising cost of supporting an ageing population.
It’s also expensive: the Financial Conduct Authority (FCA) in the UK found that consumers could save £115 million to £230 million annually if they shopped around for pension services.
Can pensiontech help overcome these problems? Industry and regulators hope so. New pension technologies should make pensions information easier to access, and pension planning less painful to execute. Businesses can gain efficiencies by using the latest technologies to manage employees’ funds.
But there is one major factor blocking these benefits: a lack of knowledge about what pensiontech is, who provides it, and who can use it. This is why Holland FinTech is featuring a Personal Finance and PensionTech track at the upcoming Fintech Vortex on the 26th September, 2017.
Fintech Vortex will build upon our PensionTech Summit, which we ran with our parther KPMG earlier this year. All companies and investors are welcome to join us, learn more, and connect with potential parters.
In the meantime, what issues are consumers facing, and how can pensiontech help?
Why don’t we save more for retirement?
Governments complain that people aren’t saving enough for retirement. Why aren’t people preparing? Surely it’s in our interest to secure our financial futures?
Research indicates that there are many reasons why we don’t plan adequately for our retirement, and that these vary depending on our age, financial situation, personal psychology, family circumstances, and various other factors. The most commonly cited reasons why we don’t plan adequately are:
- Lack of interest. According to some reports, young people are simply not interested in thinking about their retirement. They delay planning, and later in life face difficulties saving enough money for retirement.
- Lack of money. Even if young people want to plan for retirement, it may not be realistic for people who are barely earning enough to pay for the rising cost of living.
- Trust. According to a survey of more than 7,500 European workers by Aon, 7% of their survey respondents think pensions are “a con.” The Financial Times claims that consumer trust in pensions is lower than their trust in banks and energy companies.
- Perceptions of responsibility. Aon also report their survey shows that one in 20 Europeans is planning to live off state benefits rather than save for retirement.
- Poor management. Many people are speculating on their retirement income without being aware of it. They may believe their funds are safe, but in fact be risking loss.
- Passivity. People often stick with the pension fund provider their employer has chosen, even if they have the freedom to choose another plan that would make them more money, reports Aon. This is largely because it can be difficult for consumers to tell how one provider differs from another.
- Issues tracking funds. People have trouble tracking their pensions, especially if they have opened up accounts with multiple fund providers (such as when changing jobs). According to the UK government, around £400 million worth of pensions pots are currently unclaimed.
These problems are highly diverse. How might pensiontech help?
New pension technologies for consumers
Pensiontech refers to any technology used to manage retirement funds. It includes products for both consumers and businesses. Like other financial products, pensions are moving towards personalisation, giving consumers greater oversight over their pensions and more choice as to how they manage them.
Until recently, pensions have lagged behind other kinds of financial services when it comes to making the most of technology, but this is changing. Technologies like smartphones, blockchain, big data, robotization, cloud technology, and artificial intelligence are stimulating the development of consumer products and services for pension management.
Here are some of the most accessible products for consumers.
Online retirement calculators. Online calculators and planners were probably the earliest retirement tool to become available to consumers. Examples of retirement calculators include the Personal Capital Calculator, Financial Mentor’s Simple Retirement Savings Calculator, – if you’re really keen to retire in style – the Millionaire Calculator.
Retirement calculators give consumers an easy way to figure out how much money they need to save in order to retire comfortably. Users do not have to understand the equations behind the system: they simply plug in a series of numbers (salary, savings, etc.) and let the calculator do the work.
Interfaces are visual, using graphs to show you how your money is working for you. Rather than paying for specialised financial planning advice, consumers can see for themselves what steps they need to take. This makes retirement planning cheaper and easier, and potentially far more accessible to the broader population.
Smartphone apps. Whereas retirement calculators gave consumers access to retirement planning tools via their computers, smartphone apps bring retirement planning to the comfort of the couch – or the café, the park, or anywhere they may happen to be. This mobility means people can incorporate pensions into their everyday life.
Much like we’ve become accustomed to checking our bank balances on our phones, apps let us check our pension balances and savings progress. They also simplify how we log into our accounts, reducing the risk that we avoid checking our funds because we don’t remember how.
Most retirement planning apps are offered by specific pension funds. Consumers can also choose from numerous non-proprietary retirement calculators that have either been converted from desktop to app, or built specifically for smartphones. Also on the horizon is the so-called digital dashboard, which will (theoretically) aggregate all of your financial information in one place (see below).
In the Netherlands, KPMG is directly targeting public apathy towards pensions. Their concept, Pivot, is set to use blockchain technology to process information in real time and deliver it to consumers via their mobiles.
Smartphone retirement apps transform how we engage with pensions from a task on the bottom of our to-do list into something that is right in front of us. Just as banking apps have made it easy to take care of our finances, pension apps could dramatically reduces the inertia that prevents people from thinking about retirement.
But there’s one catch: people must be motivated to download these apps in the first place.
Information about pensiontech needs to be delivered through the right channels. Companies and consumer interest groups have begun to use social media (such as Facebook) to reach consumers. To overcome consumers’ lack of interest in retirement, some companies are experimenting with gamification to make pensions fun.
Retirement apps in the Google Play store.
Digital dashboards. A major problem with pension management is that people’s retirement fund information is usually not centralised. Most people either have several retirement funds and pension entitlements (such as state pensions), or their pension savings are kept separately from their ordinary savings, and so on.
Around the world, consortia of pension funds, technology companies, and government agencies are collaborating to solve this problem by developing digital dashboards that will aggregate consumers’ retirement fund information in one place. This will give consumers a new level of oversight over their retirement funds and pensions.
In the UK, a group of 17 pension funds and six technology firms has already delivered such a system to the government. It will show users their state pension as well as other accounts, but at this stage will not include public sector defined benefit schemes.
An interesting question is whether digital dashboards will relieve consumers from having to seek advice, or prompt them to seek more advice. Seeing all their “pots” in one place should help consumers to make their own decisions, but it may also make them aware of problems in their pension plans that they do not have the capacity to address themselves. Either way, the expectation is that digital dashboards will prompt consumers to engage more with their pensions.
Robo advisors. It may sound futuristic, but ‘robo advisor’ simply refers to any computer software that gives people financial advice directly. Robo advisors use surveys to collect information from consumers, and then either offer consumers advice or automatically make investments for them.
According to the pensiontech industry, robo advisors can drastically lower fees (human advisors are expensive) and help consumers make difficult decisions. They save people the time and cost of having to talk with an actual human being.
However, some professionals doubt whether robot advice can replace human advice. We do not know whether people will trust robots, and we also do not know whether robots are capable of giving advice that is attractive to the person seeking it.
The business case for pensiontech
Consumer finance is becoming increasingly customer-centric. More and more products are being tailored to consumers’ needs. The pensions industry is no exception. While businesses have been using pension technology for decades, improvements in technology (such as in APIs for finance) and changes in regulation (such as PSD2 in Europe) are making it worthwhile to explore new solutions, as well as new business partners to deliver them.
Pensiontech is now receiving considerable investment from industry and government. If pensiontech does prove popular with consumers, then service providers will have no choice but to adapt.
Fortunately, pensiontech can help companies as well as consumers. First, it can help businesses to manage their employees’ funds. Second, access to real-time information can help companies manage assets, liabilities and risk. According to David Cule of Punter Southall, in the past it didn’t matter much if funding calculations took months or even years. Today, due to market volatility, companies:
“need the information to hand at that exact point – they cannot afford to wait months for it. And this is where technology is a game-changer.”
This applies to smaller schemes as well as larger ones. The outsourcing of risk and management means that responsibility has also decentralised. Benjamin Reid, co-founding partner of PensionsFirst, notes:
“We have realised that it’s not just the pension plans that are managing the risk but all of the advisers, service and solution providers as well.”
Because pension management is decentralising, all companies working in or with pensions need to be technologically and financially literate in order to minimise risk.
Businesses face numerous barriers to adopting pensiontech, including the cost of implementing solutions, knowledge of what solutions exist, the traction of financial technology in the pension area, and in some cases, the difficulty of achieving agreement when different parties are involved in making decisions.
How can companies overcome these barriers to accrue the benefits of pensiontech? Reid says:
“In many ways it is about being able to demonstrate the value of the technology – the pensions industry isn’t set up to understand technology in its pure sense it is set up to understand value-added advice or solutions and these are being greatly enhanced by the smart use of technology.”
In other words, pensiontech will make its way into the pensions industry by way of social proof. When companies see cases of its successful application, they will be better placed to incorporate pensiontech into their business models and strategic planning.
The same holds for consumers, who are most likely to uptake products when they see people they trust using them and witness pensiontech’s benefits for themselves. This shared curiosity will stimulate the uptake of pensiontech in everyday life.
By Erin B. Taylor, Senior Researcher at Holland FinTech
Want to learn more about Holland FinTech and the pensiontech firms in our network? Join us at our FinTech Vortex event in the Hague on the 26th of September, 2017. Tickets available here.