Author: Alan Baker, Head of DB Solutions Development, Mercer UK
Technology is evolving at an astonishing rate, so much so that it can be hard to keep up with it all and work out how technologies can be applied to different industries. The use of new tech in the pensions industry can offer tremendous advantages and new ways to deal with the challenges of today and tomorrow. The FinTech world is booming with Silicon Valley, London and Berlin honeypots for rising start-ups straying into all walks of financial services, but it is something that has yet to make a sizeable impact in the pension industry. So, what if a Silicon Valley mindset was applied to pensions? How can advances in technology help to manage challenges of risk, administration, investment and member communications? It seems ripe for disruption.
Traditionally, de-risking pension schemes is a slow and difficult process - compiling scheme details and member data, inviting insurers to provide proposals, comparing options, assessing the impact of member option exercises and so forth. While these steps are necessary to get the de-risking process right, it can be made considerably easier and faster by using Application Programming Interfaces (APIs) to connect the different parties involved. APIs, although not an overly new technology, bridge the gap between different systems enabling frictionless communications and data sharing, it’s the technology that allows you to book flights with easyJet via Expedia.
APIs could help sponsors share their scheme-specific details and member data with a wider insurer audience to get pricing options faster and track developments over time or following adjustments to the scheme. This way, you can respond to market changes as they happen more quickly and efficiently.
Robo-advice, otherwise referred to as automated advice, is a topic gaining traction in wealth advisory. Traditionally, financial advice has only been a viable option for the wealthy whose assets were enough to make it cost-effective, leaving the mass market largely uncatered for. While it’s still only a fraction of the overall investments market, robo-advisors have gathered around $225 billion assets under management (AUM) as of 2017, a figure that is expected to rise to more than a trillion by 2021. Acknowledging the potentially democratising force that robo-advice could play, the FCA has set up an ‘Advice Unit’ to help firms develop fully or partly automated online services. Robo-advice also has wider implications for the institutional market, as the democratisation process could mean that increasingly smaller institutional investments tailored to the individual investor’s needs become possible. Investors should make sure that they explore their options to see if they can benefit from a combination of traditional human and robo-advice.
Thinking about fluctuation and how to ensure frictionless transfer of employees between businesses, the administration of pensions is one area that comes into focus. We’re seeing more and more administrative tasks being automated, and pension administration is, theoretically, not immune. It’s very easy to see how blockchain, an open distributed ledger technology, can be applied to the area of pension administration to improve the process for members. Removing the need for third party intermediation, smart contracts could be established, so that when a member reaches retirement age, the smart contract automatically executes and releases the member’s pension.
This wouldn’t necessarily mean doom and gloom for the pensions industry, it would simply mean evolution, instead of being responsible for the physical administration of pensions, administrators would become responsible for the application layer through which members manage their pensions.
Building on the blockchain could also eliminate the need for tracing services through the use of a digital ID. Instead of members having to keep tabs on their pensions with all their various employers, a pension could be tied to a digital ID making the need to track pensions a thing of the past. Thinking more holistically, with everyone’s pensions being stored in one central repository, the blockchain, it makes the much discussed Pensions Dashboard a feasible reality.
But before we run, underlying any pension administration is the data, and making sure that it is accurate and can support other activities is key. Work to review and maintain data can be time consuming, but big data and Artificial Intelligence (AI) represents an opportunity to streamline a number of processes.
Tech companies know that the success of a product very much depends on the user experience it provides. People will dislike even the best product if it is presented in a confusing way or if the functionalities that they actually want are hidden underneath a dozen unwanted or unnecessary features. This thinking could also be applied to providing DB member options and communications that are personalised towards the needs of the individual employee and presented in an easy to use and engaging manner. Big data applications could again be a route to be explored when it comes to analysing employee data and finding ways to provide individual options. Targeted communications that rely on highly engaging media like video and potentially chatbots ensure that the hard work that is put into the design of the plans and options pays off in increased employee engagement and satisfaction.
One of the main concerns when it comes to DB pensions is how you fund your plans. To really manage this, you not only require full visibility of current assets, liabilities and funding levels, but also on future developments and foreseeable changes to any factors that might influence funding. With data, this becomes easier to predict. Member data can be used to provide custom projections and all of this while being very easy to use, would be a way to use technology to make taking informed decisions around funding DB plans much faster and more convenient. Whilst linking all the scheme data together and looking across the whole balance sheet of assets and liabilities ties in with the Integrated Risk Management (IRM) perspective put forward by The Pensions Regulator. And we cannot yet fully grasp the implications that big data could have in this space, especially regarding more precise modelling and projection functionalities.
While some of these applications of tech might sound a bit ahead of their time, many of them are already used by sponsors, trustees and consultants. Others are being explored and developed. What becomes clear, however, is that there is huge potential for the use of new technology within the DB space and that they are worth more than just a fleeting glance.
This article does not contain advice in respect of actions you should take. No decision should be made based on this information without obtaining prior specific, professional advice relating to your own circumstances.