The pensions industry needs more innovators

Research from the Pensions Policy Institute issued earlier this year, shows that whilst technology can aid engagement, using alternative techniques such as compulsion, safety nets and consumer protection can also connect with consumers about savings.

What the PPI found on customer engagement is that starting from a pensions perspective is probably a hindrance, if not a downright turn-off.

Customers respond much better to general terms such as “financial wellness”. Pensions education should be embedded into broader coaching around long term saving, active ageing and social care.

Regulation has made pensions a silo

Providers are hampered by the fact that the very generous tax treatment of pension savings inevitably comes with copious quantities of regulation.

Successive governments, recognising the valuable contribution the public purse makes to pension pots in terms of tax relief, have been keen to ensure that the money they give is used for the right purpose, and that purpose only.

It can be hard to innovate when regulation defines so much of what pension products must do and how they must be sold and administered.

Encourage savers

We know most people are not saving enough. Even after the automatic-enrolment phased contribution increases are completed in 2019, those on the statutory minimum will only be saving 8% of band earnings.

Recent research by both the Pensions and Lifetime Savings Association and Aviva have independently shown that what is really needed is around 12 per cent of all earnings from pound one — so we have quite a long way to go.

Rather than waiting for government to increase the minimum contributions or for the vast majority of employers, who want to pay no more than the minimum, to change their spots, this is a fantastic opportunity for pension providers to innovate.

The platform is built, the costs are already covered, so we can offer unrivalled value for money to additional employee savings, if only we can think of an innovative way to encourage them.

Decumulation needs a rethink

In decumulation, the Financial Conduct Authority’s Retirement Outcomes Review paints a dismal picture.

First preference among consumers is currently to cash in their pension, with the traditional annuity lagging forlornly in third place. That is hardly surprising, as the terms and conditions of the annuity were laid down by HM Revenue & Customs in days when consumers had no choice but to buy them.

Bring in the marketing people — can someone please design a guaranteed lifetime income that consumers will actually buy?

Demographers and economists know it is what consumers need, but it will take an innovator to build a product that meets those needs in a way that is both enticing and overcomes the perceived drawbacks of the traditional annuity.

Regulators play a key role

We see groundbreaking changes in pensions around once every ten years, like A-Day in 2006 and the pension freedoms in 2015.

Between those we need regulators with a mindset which welcomes incremental change, such as adding innovative products to the standard assets list for self-invested personal pensions quickly.

The FCA’s “sandbox” approach is a great way of trialling new ideas. I suspect the Pensions Regulator can be an equally open-minded regulator once they have completed the auto-enrolment roll-out and the authorisation of mastertrusts.

Over £10bn has been cashed in from pension pots already under pension freedoms. That should be a wake up call reminding providers, regulators and government that innovation is needed to keep retirement saving at the forefront of modern day living.

Adrian Boulding is director of policy at Now Pensions