Pensions in an open finance future?

Life insurance, you say? I have a policy, which will pay out enough to ensure the cat can keep his favoured spot in the event I am no more. Other necessities, like buildings, contents, and travel insurance also form part of my financial portfolio.

But do I feel I have control over all these accounts and my data? Can I remember all the log-in details? Do I know if I am getting the best deal for each of these products?

No! The Financial Conduct Authority has a vision of a simpler world in which it might be easier for me to answer these questions in the affirmative: open finance.

More information does not necessarily equal better decision-making and, indeed, recent pensions policy has been grounded on inertia, rather than informed choice, for that very reason

In this world, I would have a single digital identity that I could use to access all my financial accounts, be able to delegate access to my data to third parties that might give me better deals and smarter products automatically, and have greater control over my finances, as I would be able to access them more easily and see all my financial information in one place. 

The FCA believes that the new opportunities this world would unlock could improve the financial health of consumers in the UK. This is at the foundation of its call for input, which runs until mid-March. 

Possibilities endless

The PLSA recently held a roundtable on behalf of the regulator to explore the potential implications of open finance for pensions. Platforms that could integrate information about the totality of financial products a consumer uses might have real benefits.

They could, for example, empower consumers by enabling them to make more informed financial decisions about their retirement savings in both the accumulation and decumulation phases.

In accumulation, the open finance environment might help savers to balance their short and long-term needs more effectively than they do today, utilising some of the ‘save more tomorrow’ techniques favoured by behavioural finance experts.

For example, savings garnered by automatic switching to cheaper insurance products might be rolled over into a pension, rather than a bank account. Over a lifetime, this joined-up approach could have a real impact on the adequacy of an individual’s retirement savings.

In decumulation, platforms of this sort could help to improve access to, and the attractiveness of, financial advice by reducing its cost.

A large amount of advisers’ time is taken up in the exploratory phase, in which they attempt to uncover all the information relevant to the advice sought by the consumer in question. If this were readily available, the advice process might not only be cheaper, but quicker and more efficient, and the potential benefit to savers if more were to take financial advice could be significant.

Do we want a return to engagement-driven policy?

Alongside these potential benefits lies a multitude of risks and challenges, which we need to be honest about.  

Consumers would doubtless be nervous about the possibility of scams, if all their account information was available online at the click of a single button. The government and regulators need to continue to lead the way in developing robust identity verification processes, to ensure that those people accessing account information are the right ones.

There is also a real question about the place of technology like this in the panoply of policy levers. More information does not necessarily equal better decision-making and, indeed, recent pensions policy has been grounded on inertia, rather than informed choice, for that very reason. 

Decades of experience showed informed choice did not work, given the huge information and capability asymmetries that exist in pensions.  We should beware of replicating the behavioural issues of the past on the tablet displays of the future.  

Moreover, the government must recognise the potential unintended consequences of open finance for workplace pensions.

Accumulation products are priced on the basis that they are long-term investments. If open finance were to lead to auto-enrolment savers constantly transferring funds from workplace pensions to self-invested personal pensions, it might very well affect the ability of schemes to maintain their low charging structure.

As ever, with all ‘big bang’ reforms, the government, regulators and industry need to consider the likely implications from end-to-end before acting.

Pensions dashboards provide a potential step towards this new world, and the PLSA will be exploring issues like these further over the course of 2020, particularly at our forthcoming Technology Conference in the autumn.

George Currie is policy lead for lifetime savings at the Pensions and Lifetime Savings Association