Pensions dashboards will enhance pension providers’ customer service. Here’s how
What are pensions dashboards?
Open Finance drives greater transparency of pensions and investments impact
The issues of pension engagement and the impact of investment are coming to a head with campaigns like MakeMyMoneyMatter, the need to build back better after Covid-19 and regulatory change. It is no coincidence.
More than 10 million people are contributing to workplace pensions following auto-enrolment, but engagement and contribution levels remain low. Traditional ways to engage people in later-life planning have not worked. And this matters, as the vast majority of people are at risk of lower living standards in retirement.
Bridging the engagement gap
One way to bridge the engagement gap is to talk about the things people say they care about. A range of studies, including the FCA, show people - especially younger people - are more likely to engage, save more and take some investment risk when their pensions are responsibly invested.
Percentage of members willing to engage, contribute or take more risk if pension savings are responsibly invested - Data source: FCA
All investment has impact, and regulators, scheme managers, providers and members are increasingly incorporating environmental, social and governance factors as part of prudent risk management. Now, schemes’ statement of investment principles have to state how they account for financially material considerations, including Environmental, Social and Governance (ESG) considerations like climate change.
The overwhelming majority - more than 90% of master trust pension scheme members - are invested in their providers’ default fund. Default funds provide many important protections for pension members. So why not tell scheme members about the real world impact their pension contributions are having while invested for their future within the default fund? This Quietroom video shares pension savers’ positive reaction to seeing their pension is invested in housing, hospitals and renewable energy - and horror at the thought it could be funding tobacco or coal.
A recent DCIF report showed 80% of DC savers want their pension investments to do some good as well as provide them with a financial return. Younger cohorts and women are particularly interested in the impact of their money and ESG issues (Ref. 1) so there is an opportunity to have an outsized effect engaging with these groups that have often been underrepresented and underserved.
“A recent DCIF report showed 80% of DC savers want their pension investments to do some good as well as provide them with a financial return.”
Using technology to make it personal
Open Banking and Open Finance are secure data-sharing frameworks that enable data from utilities companies, ESG ratings and investment fund holdings to be combined with financial data sets to support a range of propositions to resonate with people.
While millions of people are in the same default fund, a provider could share personalised communications based around members' preferences. For example, two members invested in the same default fund could receive different digital annual statements: highlighting the amount of renewable energy generated, or tonnes of waste diverted from landfill for a member with environmental concerns, while another member in the same default hears about improvements in diverse board representation or gender pay gaps. Across millions of members, or retail investors, those same preferences could inform future proposition development around thematic default funds or retail investment funds based around the UN Sustainable Development Goals. Examples are emerging through The Big Exchange (co-founded by The Big Issue) and tickr.
An aggregated view of someone’s personal finances is an essential part of sound financial planning. Including ESG ratings and fund holdings into this view helps informed decision-making and sound investment diversification. For example, a holistic view of pension, ISA and general investment accounts could reveal a concentration in particular sectors or firms. Sugi is the UK's first app to check the carbon impact of investments and compare investments across a range of funds and platforms to help consumers’ build a greener portfolio.
Read more about Sugi here
With the data capabilities in place, Open Finance enables firms to cost-effectively deliver a level of personalisation and insight to consumers previously the preserve of conversations between high-net worth individuals and their wealth managers.
Footprinting everyday spending
Companies such as Co-Go are already integrating carbon and transaction data to create a carbon footprint tracker for everyday spending. Elsewhere, integrating utilities bill data could show the real payback for a green retrofit of your home, for example.
Cost-effective technology brings transparency
For asset managers, these alternative data sets can not only inform future proposition development around thematic default funds or retail investment funds, they can also be used in equity and fixed income research. More than $30 trillion - which is more than a third of the world’s professionally-managed assets - are in ESG and impact investments. Yet, as noted in a recent Columbia Threadneedle report, ESG data has been hampered by a lack of verification as researchers have relied on voluntary disclosure in annual financial and CSR reporting. Open Banking and Open Finance could provide “alternative datasets” to help “minimise reliance on voluntary disclosure”.
Open Finance provides transparency for customers — be they individuals or companies — and employees to align their purchasing, saving and investment choices with their values. Technology, member appetite and regulatory support together mean best in class providers are tantalisingly close to bridging the pensions engagement gap.
Author
Hannah Gilbert
Hannah is a Client Director with senior industry experience in financial services, telecoms, public and not-for-profit organisations. Hannah has co-authored policy papers including “Pensions for the Next Generation: Communicating What Matters” and has consultancy experience in sustainability, responsible investment and social enterprise. With two Masters (Economics and Sustainable Tourism), Hannah is on the EMBA programme at Cass Business School and Women in FinTech Powerlist 2019.
Putting pensions within reach
COVID-19 – The Pension Contagion
Could micro payments be the solution to the pensions crisis?
With auto-enrolment rates rising this April from 2 per cent to 3 per cent, and the government announcing their intention to provide a top up to savings in the form of tax relief, it’s optimistic to assume everything will all work out in the end because, in theory, it should.
However, despite the increase in auto-enrolment rates and employer contributions rising to 5 per cent, there remains a significant gulf between what people are putting into their pension pots and the amount they will actually need to retire comfortably. A pensions crisis grips the nation; Britain’s ageing population and the rising costs of long-term elderly care is fast-creating a funding shortfall for sufficient support and the confusing pension tax relief system certainly hasn’t helped in incentivising Britons to save for the future.
If that wasn’t bad enough, new analysis of official data on UK household incomes indicates the gap between men and women’s pension income is more than twice that of the gender pay gap at 40%. According to a paper from the Centre for Policy Studies, 2018 was the year that saving in Britain dropped to a record low with households investing just 4.9% of their income for the future.
Experts suggest the reason behind the pensions gap (the difference between the current rate at which we are saving and the amount we will need for the future) stems predominantly from the complex nature of the pensions system. This is supported by findings from a study of UK workers conducted by PwC in which six in ten (59%) respondents said their lack of understanding puts them off saving more.
Unfortunately, solving the pensions crisis isn’t a simple case of increasing auto-enrolment rates. If workers today are to retire comfortably, government and industry must find a way to inspire people to take a proactive approach to their pensions. Fortunately, the introduction of PSD2 and the momentum towards open banking offers promise in the form of cutting-edge financial technology.
With seamless data sharing made possible through smart APIs, there is huge potential for banks to facilitate the act of future-proofing our finances through intuitive apps that make money management as quick and easy. Through open banking, there exists a real opportunity to provide customers with a holistic view of their finances across all accounts. With this in mind, pensions have the potential to become less of a dusty piggy bank on a bookshelf that no one wants to think about, to just another component of our unique financial profile that we top up every day.
Having recently been accepted into the Open Banking Implementation Entity regulatory sandbox, Moneyhub has an exciting opportunity to test innovative financial tech products, services and features that could be transformational for the consumer payment experience. Being able to do this within the sandbox, allows us to deploy to customer quickly, without the usual compliance hurdles that can stand in the way. We truly feel that tech has the potential to solve a whole raft of consumer finance problems, not least helping with our current pensions funding crisis. As such, a key part of what we will be trialling in the sandbox, is making managing finances easier with micro-payment using PISP (Payment Initiation Service Provider), with Starling Bank.
The idea is to create a system in which frictionless micro-payments are made to your pension pot with your consent, and integrated as part of your daily financial activity. Some of you may already be familiar with micropayments, but this is the first solution of its kind that automates micro-payments in real time to promote a proactive approach to saving.
Until now, any micro-payments a user intended to make would be tracked and compiled into one high transaction at the end of the month – a helpful feature, but it certainly doesn’t encourage better savings behaviour. Through our work with Starling Bank on micro-payments, Moneyhub will up your spare change in real-time - whether that’s 80p that you saved on your daily food budget or the £4 you saved on bus travel last Wednesday.
On the surface, it may not seem like much. However, a few pounds every day really adds up for retirement. Soon, the spare change that was swept up begins to make for a sizeable pile. As the interest accumulates, what started as a few pennies in a jar can quietly become a comfortable retirement income. Even just £2.50 a day for a 30 year old can grow to be worth £85k in retirement – a figure which seems daunting and out of reach today, but is perfectly achievable through daily micro-payments.
What’s more, I’m sure you’ll agree that it’s better to skim off a little extra from your daily spending and have it automatically sent to your savings than see a large lump sum leave your account at the same time your bills and rent are due. By taking advantage of the possibilities born from open banking, our goal is to encourage a shift in attitude. We want to help people to view forward-planning for their long-term finances not as an intimidating mountain to climb in the future but an achievable target that can be easily tackled through minimal daily contributions.
Already, our involvement with the sandbox has provided invaluable insight into consumer behaviour and revealed the positive impact that nudges can have on our saving and spending habits. We’ve found that it really doesn’t take much for people to start changing their financial behaviours – just a push in the right direction like a health tracking app encourages us to take more steps or drink more water.
Thanks to our integration of Starling Bank’s API into our payment gateway, users can already initiate a payment straight from one account to the other in real-time, whether it’s an ISA, a savings account or a pension pot. Our upcoming trial of micro-payments using PISP offers a new solution to tackling the pensions crisis. By embracing an open, API-led approach, banks can play a leading role in transforming the way people view their pensions.
Rather than a looming concern that becomes scarier the longer you put it off, planning for retirement can become a proactive measure that people find satisfying – and you would be surprised how much you could save. In the long-run, it’s the 20p spare you had on an idle Tuesday that could just make all the difference.
We need to end pension silos
Understanding the big picture, and taking all elements of an individual's circumstances into account, is critical in making good financial decisions. Yet, when it comes to planning for retirement – arguably one of the most significant financial decisions – most of us tend to think about our pensions as entirely separate to other assets we may own such as property and savings.
It’s not hard to see why: for too long, pensions have existed in a silo of their own. Perhaps it’s failure by design; the traditional way in which financial advice products are set up focus too much on making people experts in specific investments instead of looking outward to interlink with other products. With regard to pensions, the industry has designed products and services that are too narrowly defined.
Meanwhile, the profusion of specialists in finance has caused the sector to split off into separate islands, with pensions so far a-drift that consumers are simply unable to view them within the same landscape.This, coupled with a series of stringent regulatory requirements, has seen the industry lose sight of the way in which pension policies connect with the wider savings ecosystem.
In some ways, the silo-approach is understandable. Considering the complexity involved in advising in fields such as investments, mortgages and pensions, it takes time for specialist advisors to gain the appropriate qualifications and undergo the relevant training to be able to advise on these specific subjects. Specialisation may be at the heart of enhanced productivity and improved efficiency, but it can also lead to tunnel vision, whereby neither advisor nor consumer can foresee blind spots until they materialise.
Take property, for example. According to recent research from Retirement Advantage, over-55s in the UK could now access a cumulative £375bn in housing equity – this rose by £2bn just in the third quarter of this year (a 2.7% increase), and in some areas of the country the increase was nearly double this, with the East Midlands up 5.1%, the South West up 4.8% and the West Midlands up 4.6%. Meanwhile, research from SunLife found that four in ten of over 55s of are worried the money in their pension may not be enough to cover their retirement and are looking for alternative ways to increase their income in retirement.
This research clearly shows that people across the UK who own property either outright or with a mortgage are likely to have equity in their homes which they can tap into for retirement, and yet the silo-effect of the pension sector means the question of accessing this wealth may not even be raised. Even if a client has no intention of selling their home or downsizing, advice that identifies all options by looking at the bigger picture surely leads to better client outcomes.
Over 55s may be asset-rich, yet as they approach retirement, it’s apparent that they are concerned the funds in their pension will not be able to support them. With the increasing need to serve a growing population of older homeowners, the pension industry and financial advice in general must evolve to help retirees make better decisions. In light of this, the Intermediary Mortgage Lenders Association (Imla) called on advisers to "break down the silos" between pension and mortgage advice after figures from the ONS revealed UK homeowners were ageing faster than the wider population.
Perhaps the problem is not with specialisation, but the by-product it has created in silos of data and silos of how products are discussed. With each respective financial services provider holding on to their own piece of the pie, the consumer must hop between organisations or even between separate departments of the same organisation to get a full scope of their financial situation. In either case, the result for each advisor is a disconnected view of the customer.
We as an industry have a responsibility to provide clients with advice that keeps their best interests at heart, but how can we achieve this if half of the puzzle pieces are missing? The advice we deliver is based on the data we can see; consumer decisions are based on the advice they receive from their separate advisors and so the fallacy that pensions are a separate asset is perpetuated and the cycle continues.
Fortunately, there is a chance that a change in attitude within the savings culture could see the silo approach slowly coming to an end – or at the very least, face disruption from regulatory change and the new market entrants that come with it. According to rules set out in the retail distribution review and the mortgage market review, advisers can only be confident of giving the best advice to their customers if an assessment is completed that covers all elements of a client's wealth, including their plans for the future and their relationship with risk.
With the introduction of game-changing legislation set out in PSD2, the pensions industry stands on the cusp of revolution in the way that consumers interact with their finances and manage their pensions. Open banking data could be the catalyst that sparks industry collaboration to bring about connected customer insights to the benefit of both financial advisors and consumers. While there are still uncertainties as to when the long-promised pension dashboard platform will launch, innovative solutions that bring customer data into one place can provide consumers with an interlinked view of their financial assets.
Collaboration will be the key to empowering consumers to make better decisions now and in the future; mortgage brokers and retirement planning advisors, for instance, should be working together to determine all the investment and pension options that could benefit a client.
Through increased industry collaboration, financial advisors in every specialism gain deeper insight that enables them to enhance their customer experience and provide well-rounded advice that takes into account all the elements at play. Clinging to silo-mentality, on the other hand, will only hold us back from evolution and prevent customers from getting more from their pensions.
If its transformation we want and client satisfaction we strive for, we need to start thinking about the consumer as a whole, acknowledging their wealth for what it is: a web of multiple accounts, assets and liabilities that connect to create a unique financial profile. By breaking down the silos that constrain the pensions industry, we can support individuals to manage their financial futures better by putting them back where they belong: at the heart of the advice process.
What does the auto-enrolment increase mean for you?
As the next increase for auto-enrollment goes live, it’s essential that providers think about how they’re going to keep these customers engaged or they risk losing revenue.
The latest data from The Pensions Regulator showed in January a total of 10 million workers were automatically enrolled into a pension scheme while 11.5 million were already active members of a scheme and 438,000 were members of a defined benefit or hybrid scheme.
From the 6th April, the minimum contribution rates rose from 5% to 8%, with the employee paying 5%. But while this is a positive step for lifetime saving, there’s a real risk that as the contribution levels rise, so does the risk that people will choose to opt out, deciding to fend for themselves instead.
Key to this is making sure that customers are fully aware of the benefits of regular pension contributions.
This means helping people be more engaged in their finances, making them more aware of how they’re spending and how they’re saving. They can also help set sufficient savings goals and enable them to visualise what these mean in reality.
Help identify goals – Short-termism is a real issue when it comes to lifetime savings. With day to day money worries often difficult to avoid, thinking about retirement can often seem like too much of a luxury. But by helping people set clear long-term financial goals, putting a bit more aside each month can make a lot more sense.
Improve visibility – People shouldn’t view their pension balance as an abstract pot of money disconnected from the rest of their financial universe, it should be there front and centre when they consider their complete financial health. Putting pensions savings pot(s) on an easily accessible platform gives people a constant reminder that saving for retirement is at least as important as those shorter-term saving goals.
Involvement in the process - Playing a more active role in the process should also be considered. By giving customers access to the necessary tools to help them save for their future, and involving them in the decision-making process, later life saving will seem more important.
Show, don’t tell - The world we live in now is all about visibility and awareness, and it’s important to do more to educate and engage. By clearly demonstrating the impact that incremental saving can have on long-term finances, people’s willingness to save a little more each month for their retirement will increase.
Auto-enrolment should be seen not as a hurdle but an opportunity. By delivering additional value, providers will strengthen customer loyalty, boost assets under management, and put themselves on a stable financial platform going forward.
To find out how we can help your business evolve, get in touch on 0117 280 5155 or email enterprise@moneyhub.com.