Evolutions in the technologies implemented in the finance industry are leading major transformations. Pensions, one of the most conservative fields in the ecosystem, do not escape the firm hand of progress. Digitization shifts our ways of communicating and analyzing financial data, eventually impacting this industry.
This influence can be felt throughout the several layers of pension systems; from customer experience to back end machinery, innovation impacts the pension value chain, ultimately operating a shift in an industry that has run on the same models since WW2.
- Impact of information technologies on the value chain
Disruption in the pension industry is nonetheless a rather well-known phenomenon, as it has been influenced by technology since the start of the global Internet adoption, roughly twenty years ago. At the time, providers in the market were all-powerful entities due to a lack of transparency, which was partially caused by the existence of complicated products that only actuaries could truly understand.
A few years later, the introduction of smartphones and a globalised use of the Internet enabled third parties to disrupt the market by offering comparison tools and apps, such as Pension PlayPen or pensions.market. This ultimately instilled competition in the market between providers and raised the status of advisers. Technological innovation started then to impact scheme management in the pension industry.
Today, the technological advances induce consumers to have more power than ever in the market, a typical trend in the finance industry at large. The amount of data available, accessible to all and easy to digest, destroys the now clichéd image of a naïve and uninformed customer. As a result, commission are lower than ever and charges are regulated.
Indeed, financial technology innovations are globally increasing the efficiency of pension schemes and the design of products. Innovation includes better risk management solutions, automation of investment processes and facilitation of regulatory compliance, but also better personal data management. As a result, more competitive prices are weighing upon the old models.
Furthermore, the impact of improved transparency is clear in the roles that players in the market assume. Third parties such as advisers, employee benefit consultants, and corporate consultants are thriving in the industry by taking on roles previously reserved for providers, or taking advantage of the need for counselling brought by consumers’ better independency.
The traditional employer/adviser relationship can even be broken in some cases, as consumers can access relevant information without difficulty. The pension ecosystem is therefore currently having a strong impact, disrupting relations between advisers, providers and employers, while fintech in general is increasing the accessibility of pension investments by a broader consumer base.
- AI and investment management
Artificial intelligence, and particularly its robo-advisory use cases, deeply impacts the pension industry’s investment management and will do so increasingly. Robo-advisors are cheaper than their human counterparts, easier to access, and available to a larger number of people. According to a report from the OECD, robo-advisors deliver “financial advice that is objective, consistent and transparent”, thanks to the use of unbiased algorithms that cannot be swayed. They overcome conflicts of interests, notably ones stemming from compensation received from advisors’ recommendations, which could jeopardize returns on pension investments.
This technology also provides a better affordability of, and accessibility to, a broader range of investments, in part due to better interfaces and customer experience. This improved service is provided to consumers for a lower price than the traditional channels, as commissions are much lower than human advisors’ fees, and enables the proportion of individual investing to increase.
To include a more affordable, efficient and transparent link in the value chain is one of the main roles AI can have in the pension industry. Thanks to this technology, people could save more proactively towards their pensions and receive steady returns, enhancing the service provided.
- DLT technology
Next to artificial intelligence, the distributed ledger, which can be understood as blockchain, is one of the most recent disruptive technologies applied to the pension industry. According to the OECD, distributed ledger technologies facilitate cheaper and safer transactions, and could have a couple of use cases in the pensions sector*:
- Portfolio management: Trading (including bespoke derivatives contracts), reconciliations, foreign exchange management, portfolio rebalancing and proxy voting
- Compliance: DLT could optimize pensions administration, such as automated identification solutions (KYC) and data recording and transfers. By giving sponsors, trustees and tax authorities access to a unified, tamper-proof database, the need for reconciliation of transfers/contributions would be sharply reduced.
- Dashboards: Dashboards enabling transactions, such as consolidating multiple pots, could use this technology
- Consumers’ role
The pension sector is undoubtedly following the major fintech trends, placing consumers at the centre of the market. It is thus providing a modular approach meant to satisfy the broad range of needs varying from consumers to consumers, leading to flexible partnerships between stakeholders.
Overall, digital developments provide greater control for employees over their pensions, notably regarding transfers, customer experience/personalisation of pension schemes (better data collection and analysis). This enables a non-advised digital journey and facilitates a better communication with providers.
Leading this shift, the customer base headed by millennials is reshaping the consumer needs and experience, thus impacting the value chain. Better financial data analytics and big data uses allow for more tailored pensions plans for consumers, who are now more in control of their financial lives. Ultimately, consumers might be able to manage their entire financial lives through one unique platform.
By Jean Leguy, Research Coordinator
* Extract from (UK Government Office for Science, 2015), cited in OECD (2017), Technology and Pensions: The potential for FinTech to transform the way pensions operate and how governments are supporting its development, p.11 Box 2.