Is fintech really revolutionising UK pension schemes?
The pensions industry stands to benefit from implementing financial technology to address problems such as scheme members under-saving and not finding tailored retirement solutions, experts have said. However, not everyone agrees.
Consultancy Redington recently carried out research into the state of defined contribution schemes and fintech’s ability to address pension problems.
Global fintech investment quadrupled to $12bn (£8.4bn) in 2014, while UK household savings dropped to 4.9 per cent in 2015 from 5.4 per cent in 2010.
Robo-advisers should take a more holistic view of people and their assets, not just their pensions
Freddie Ewer, senior vice president at Redington, said the biggest opportunities for fintech are in targeting DC members who cannot afford conventional, human wealth managers and advisers.
This is because robo-advisers could aggregate more information about individuals (such as risk appetite, investment goals and spouse salary) and generate tailored advice more cheaply.
However, Ewer conceded that to be successful, “robo-advisers should take a more holistic view of people and their assets, not just their pensions”.
He added the government needs to incentivise people to save more, which it has begun to do through offerings such as the Lisa and auto-enrolment.
On the subject of independent financial advisers, Ewer remarked robo-advisers “will keep IFAs on their toes and make them justify their fees”, but that ultimately IFAs and robo-advisers serve different areas of the market.
He stressed the research “isn’t saying that the IFA model doesn’t work” – only that it is not accessible to everyone.
Too complex and not complex enough
Some, however, do not share Ewer’s optimism about fintech’s impact on the DC model.
Jonathan Watts-Lay, director at financial education provider Wealth at Work, pointed out that when people discuss fintech they often mean purchasable products rather than holistic retirement services, and the former are too simplistic to be transformative.
The paradox, he said, is that most robo-adviser programs are “too complex for people to understand, but this is still only a proportion of the complexity needed for pensions planning”.
However, pension schemes are using elements of fintech effectively, albeit not as total solutions, he said.
Watts-Lay noted increasing member demand for better financial education is prompting schemes to organise more seminars, face-to-face meetings and phone calls, which they supplement with fintech elements such as screen sharing.
He added that fintech ignores the behavioural aspect of saving. People become less confident about making decisions as they grow older, increasing the risk they will be stuck with a fintech product they no longer want.
Overall, he said, “there is no evidence that… a whole-retirement fintech solution exists”.
More subjectivity needed
Roger Cooper, head of trusteeship at Pi Trustees, said the focus of trustees is on consumer needs, and that while more support is needed for DC members following freedom and choice, a subjective element is required when giving advice – which technology cannot give.
“It is in human nature to want help with making decisions… there will always be this subjective element; it won’t just be about how numbers add up”, he said.
However, he said trustees are nevertheless considering fintech, as “there is a concern that the compliance framework designed to protect members is working against them”. He explained that advisers are increasingly afraid to give advice as they are nervous about being sued.
Cooper said that fintech “can help imagine a wider range of savings” beyond pensions, which will prove useful as people focus more on accessible savings, such as Lifetime Isas.
Fintech won’t solve low contributions
DC trustees are increasingly worried members are not contributing enough to their pension pots.
Jonathan Reynolds, client director at Capital Cranfield Trustees, said fintech advances are good, but will not solve the fundamental problem that members are contributing around 2 per cent, when 15 to 20 per cent is needed.
“It’s great if we can find new ways for members to make better choices, but there will be little impact while members contribute so little”, he said. “There is no tech solution for this.”
However, Reynolds added, in a low-return environment where people save little, “costs have a huge impact on [savings] outcomes”, and fintech can help reduce them.
While the accusation that DC solutions are too one-size-fits-all is fair, he said, “DC has well thought-out, varied styling options… I’m interested in seeing existing systems improve”.