PensionTech has the opportunity to revolutionize the value chain of the pension industry by providing innovative solutions to pension funds and asset managers. Acting by and large as solution providers to the power brokers of the industry, PensionTech firms will incrementally improve the sector instead of taking over incumbents. This article provides a general understanding of the topic as well as its implications and the market’s sentiment.
The pension industry
To first understand how the PensionTech sector can operate, it is important to look at the operations of the broader pension industry. The consumer’s perspective is different across countries as legislation and state accommodations differ, but the general direction of services can be summarized as in Figure 1. The further value chain that provides services mainly to the pension funds in the form of risk analysis, custodial services, communicative and administrative services also increases the links in the chain, but these will be discussed later on, as they require a more in-depth analysis.
Figure 1: Service provision in the pension industry
Since the turn of the crisis of 2008, we have seen the pension industry change on several fronts, with trends primarily driven by technology, individualisation and aging of the population, low yields on bonds due to central bank interfering and the supply of investible capital.
These developments provide the managers of existing pension funds with a new set of challenges, as their existing business model is under pressure, while the public becomes more demanding in terms of communication and adaptability on their pension plans. Pension funds struggle with providing adequate insight of the future financial situation for their customers, giving rise to a host of financial planners filling the gap.
Furthermore, prospective pensioners are more critical of investments made by their pension funds, as they believe that investing is not only about the achievable return, but should also include a level of awareness to sustainability and good employer practices.
PensionTech could help pension funds to overcome these challenges, not as a competitor, but mainly as a service provider to solve the various challenges in the value chain. Examples can be found in the automated communication solutions, administrative solutions and many more.
The hesitation in adopting such new solutions has also not gone unnoticed by the regulators, who have become more interested in the issue. The policy memorandum of De Pensioenfederatie 2017 and the Regulatory Agenda 2017 of the Dutch Central Bank (the regulator) shows the following seven themes in which PensionTech is relevant for the pension sector:
1. Regulatory Compliance
2. Sustainable (Impact) Investing
3. Cost Reduction & Efficiency
4. Effective Pension Administration
5. Business Model Sustainability
6. Pension Communication
With consumer becoming more demanding, with these institutions lagging behind other financials service providers like banks and insurers in terms of adoption, it has become very important for pension funds to act quickly. The first major threat to their existence is that of further democratization and the so called “new economy”, with high levels of self-employment to which fixed pension contributions are not a strong match.
The second blow might come from politics themselves if governments around the world start to feel that asset managers and insurers could potentially take over the role of a pension fund altogether, offering defined contribution pension based on personal preferences and risk tolerance.
We have seen such a trend in the Netherlands during the 1990’s where a large amount of capital was subsequently invested in tax-exempt investment vehicles provided by insurers, where those that were willing to make additional savings had a higher level of flexibility than under their employer provided pension.
In the coming weeks
In the coming weeks Holland FinTech’s research is going to delve deeper into the pension industry, PensionTech and asset management. The series of articles will feature an outlook on the future of pensions and a breakdown of the entire value chain within the pension industry, including the options for PensionTech firms.
We will also look at the risks and opportunities for tech-related firms within the asset management industry, which is currently defined by low yields on government bonds, a trend towards passive investing and pressure from investors for more societal focused investment policies.
• PwC – Pension 2025
• PwC – PensionTech Review
• IBM – The future of the pensions industry
• EY – Building a Better Retirement
• TowerWillisWatson – Global Pension Asset Study 2017
• KPMG – Pension Accounting Survey in the Netherlands
• PPI – Who Pay’s the Piper?
• PwC – Asset & Wealth Management Revolution
• BCG – Global Asset Management 2017: The Innovators Challenge
• PwC – Asset Management 2020: A Brave New World
By Lars van den Enk, Research Analyst at Holland FinTech