The UK pensions landscape is at a pivotal moment. The Mansion House reforms announced earlier this year are set to usher in a shift towards higher-yield, unlisted private assets, while policy initiatives to address the number of small pots such as the 'pot for life' model propose a radical shift to the pensions landscape. These reforms present an opportunity for growth and diversification, but also require a huge upgrade on the technology infrastructure to support member choice and drive the greater efficiency that is required to increase investment budgets needed for private assets. The delays and challenges encountered with the pension dashboard, something much simpler than the changes needed to support ‘pot for life’, reflect the difficulties within a diverse and complex market that is running on technology built decades ago.
The Mansion House Compact, announced back in July, promised to increase investment in private assets to 5% by 2030. While the shift to invest in alternative growth stocks is welcome, it also presents pension providers with a significant challenge. Private assets usually incur significantly higher entry costs than public equities, and can easily be twenty times the cost of passive equity trackers for a lot of providers. This is particularly true for those that have vertically integrated investment management businesses and platforms that can run large scale passive investment solutions at very low cost.
Defined contribution pension funds are currently, on average, investing under one per cent of their assets in unlisted equities. Increasing that to five percent by 2030 without raising charges for pension holders is a significant hurdle to overcome given the substantive difference in entry costs. Simply put, investment budgets will need to increase.
Pension providers will need to find ways of negating these costs by reducing costs elsewhere. If the total expense ratio (TER) of a typical workplace plan is 40bps, some providers will be able to run cheap index passive funds as low as 1-5bps. A much bigger proportion is spent on administration and servicing – something that is much higher cost than it needs to be. Recent analysis by the DWP shows administration costs varying from £15 to £75pa, per member, across Master Trusts alone. This demonstrates the huge variation caused by scale and inefficiency that will only be wider across other types of pension schemes. Alongside the inevitable consolidation of smaller Master Trusts and Single Employer Trusts, the overriding need for cost-efficiency should begin to drive an industry-wide technological upgrade, moving away from legacy systems to cloud-native platforms that are more streamlined and represent better value.
What might this mean in practice? Providers and administrators need to leverage advanced digital systems to streamline operations, saving themselves time and money. Pension record-keeping is one area that could significantly benefit, a process that involves efficient processing of contributions, investment, unit reconciliations, claims and member data. This is a traditionally intensive task, requiring expertise to navigate the various critical aspects that underpin the administration of pensions. This process is susceptible to human errors and entails time-consuming manual procedures. However, by embracing advanced digital systems, providers can automate and streamline these intricate processes, lowering costs and passing these savings on to pension holders.
Significantly reducing customer service overheads, another significant portion of administrative costs, can also be achieved through digitalisation. Automated customer service interfaces, chatbots, and self-service portals can streamline routine enquiries and transactions, resulting in substantial cost savings. Done well, this improves the overall customer experience by making it faster and more engaging.
Beyond the Mansion House reforms, the UK pensions industry may be on the brink of a structural overhaul with the Chancellor’s consultation on addressing small pots, including multiple consolidators and the lifetime pension model. These changes, much like the Mansion House reforms, represent both opportunities and challenges for the industry. These include a highly streamlined administrative system and a robust, centralised infrastructure and clearing house to manage individual pots and pension contributions across various different providers and employers.
The move towards giving member choice would also undoubtedly drive providers to focus on greater marketing and an improved customer experience in order to try to be the provider of choice. Whilst workplace providers will naturally be concerned about the potential for retail individual plans to enter this space, those that win will be those that are relevant to the end member and that have embraced digital technology. With its scale, improved governance and lower costs, workplace pension providers should be seeing this as an opportunity as well as a threat, should both markets merge. These opportunities and challenges further underscore the need for improvements to industry-wide digitalisation, essential for equipping providers with the tools to provide greater personalisation and customer experience.
As the UK pensions industry faces transformative shifts due to the Mansion House reforms and the exploration of a 'pot for life' model, the imperative for technological advancement has never been more pronounced. For pension providers, this means prioritising technological upgrades not just for compliance, but to effectively reduce costs and deliver an improved customer experience. The winners and the consolidators will be those that embrace and invest in their underlying technology ahead of the inevitable changes that are coming, not only to avoid passing higher entry costs to members but also to help ensure the industry is equipped for the demands of a rapidly evolving financial landscape, where both efficiency and adaptability will be key to success.
Read more on this article in Corporate Adviser.
Launched in 2015, Smart Pension exceeds £4bn in assets under management (AUM) and now serves over one million members and more than 70,000 employers. It is powered by Keystone, Smart’s global savings and investments technology platform.
Aquiline Capital Partners, Barclays, Chrysalis Investments, DWS Group, Fidelity International Strategic Ventures, J.P. Morgan, Legal & General Investment Management, Link Group and Natixis Investment Managers are all investors in Smart Pension.