Five ways that technology is reshaping pensions and how it will benefit members
You could argue that the pensions industry has been in need of a shake-up for years, and the proliferation of start-up tech companies specialising in financial products (fintechs) is a welcome disruption.
So how is this disruption manifesting itself and does this really benefit us – the consumer? Will it make us richer, financially healthier and freer to live the life we aspire to? Well, the jury may be out on that for now, but let’s look at the five key areas where technology is making an impact.
1. Open banking and aggregation
The Payment Services Directive II becomes mandatory in September 2019 and will see open banking enter the mainstream. In essence, this allows data to be shared openly (subject to the requisite security) between various financial product providers. Initiatives such as the government’s ‘pension dashboard’ also aims to share and aggregate data.
The technology that facilitates the sharing of data is transforming the way we look at our finances. Specifically, it allows us to see the big picture, the holistic view. It allows us to join the dots and see how the component parts of our finances interact with each other. For long-term retirement savings this really makes it personal, significantly boosting our understanding and engagement.
2. Robo-advice and Artificial Intelligence (AI)
The spectre of machines replacing humans is a hot topic, and where the industrial revolution automated human physical labour, AI could see complex analytical and decision-making processes being carried out by machines. Some of the more rudimentary aspects of financial advice, like research and broking are already serviced very effectively digitally. But, increasingly, complex algorithmically-driven models can dispense best fit scenarios based on a detailed data set. Some might call this advice, and it is no coincidence that some fintechs, dispensing ‘robo-advice’, are regulated by the FCA. And with much of the data being drawn in automatically, you can quickly see how many aspects of the advice journey can be replaced by computers.
Will this be of benefit? In many ways yes, because it will help to democratise advice, meaning it will become accessible to far more people than it now is. Logically, if more people have access to good advice, more people will be making better decisions.
Will people be happy to take advice from a computer? It seems eminently possible. We put our lives in their hands when we fly. Soon we’ll be doing the same with driverless cars. So why not when we make financial decisions?
3. Data insights
The more platforms and digital tech that exists, the more data we amass. We are starting to see data being used in increasingly clever ways, and ways that can help us see ourselves in relation to our future selves. This is particularly valuable when planning for the long-term. How long will we live? How healthy will we be? What will our spending patterns look like? How do we plan well such that we don’t run out of money?
Smart tools are being developed that can run models and simulations, sometimes across millions of variables, that can help us vividly envision what our futures will hold. The implications on our ability to plan effectively are huge, particularly now that more of us are opting for drawdown options when accessing our pension income. Not running out of money is going to be a real balancing act, and modelling that keeps us from making wrong-turns will be an invaluable risk-mitigation tool.
4. Nudge theory
Behavioural economist Richard Thaler popularised the concept of nudge theory back in 2008. The financial services world has flirted with it for some years now, and it has proved effective in driving up engagement within those hard-to-reach areas such as pension planning.
For many, retirement is such a long way off that, despite our best intentions, we simply forget to check-in with our savings, transfer those old pots, review the investment performance, change the beneficiary details, and so on. But nudge tech can be that word in our ear, the little voice that reminds us to be a touch more responsible. Used cleverly, it can align with key moments in your life such as changing jobs or having a child, but can also allow you to set your own reminders about those things that you deem important.
Again, data aggregation and insights, coupled with nudge technology can make it personal to you – another determining factor in increasing engagement. So nudge is a great way to keep us on track for the long-term and remind us to help ourselves.
5. User experience
A catch-all term for the experience we have when we use a particular piece of technology. It can range from the functional utilitarianism that was associated with Microsoft, to the elegant aesthetic rapture Apple would have us aspire to. Whatever you believe, it is fair to say that user experience, or UX, will be a major differentiating factor in the levels of engagement with financial wellness technology, an area where we still have ground to cover.
This is particularly true in pensions, where it is notoriously difficult to get people to engage. In time, everyone will be configuring APIs, open banking, data aggregation, analytics, robo-advice, AI and modelling technology into more and more sophisticated customer journeys. The differentiator however will be UX. Those products that allows us to reveal knowledge and answers as effortlessly as possible will be the ones to which we will gravitate. Get this right, and it is another battle won in the war on engagement.
So whilst technology may not be fundamentally reshaping the concept of investing money for the long-term, it will certainly revolutionise our relationship with pensions. In time, it will help us engage more frequently and more productively, it will make transacting easier and it will help us put our finances into perspective, leading us to make better decisions and stick to good habits.
The author is Stephen Coates, Principal, Mercer.
This article is provided by Mercer.
