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Imagine having full control and visibility on where your savings are at any point in time. Imagine being able to test scenario changes and being able to see the expected impact on your own savings. Imagine feeling like you have control over your savings outcome. This is where it feels we are headed.
As we hurtle towards the reality of the Pensions Dashboard, Robo-advice and the consolidation of retail and institutional, the pensions industry will be unrecognisable in 10 years’ time – if not before. The individual will stand at the heart of the system.
Isn’t this what we all signed up to in the first place: to ensure everyone has sufficient savings in retirement?
The key drivers of change have always been on the scene in some form: technology, consolidation, government policy and education.
Technology will be at the heart of this revolution. Moore’s law broadly states that computing power doubles every two years. Put another way, in the past two years, computers have become more powerful than in all of history. Pensions are not immune to the impact of this exponential development in technological advancement.
Artificial intelligence has moved from sci-fi to reality as Google, Tesla, IBM and a huge swathe of start-ups embrace its potential. This is about computers learning how to think by re-writing their own code based on constant learning. What if we could adjust people’s savings automatically, based on learning algorithms that match their lifestyle to their ambitions?
For example, if I have a healthy lifestyle and go to the gym, my life expectancy is likely to increase, and so my requirements in retirement will change. Changes to asset allocation, risk levels, investment strategy, contributions, will all happen automatically. People may want multiple careers, time to take a break, retrain, go back to university, gain new vocational expertise and want to work beyond today’s retirement age. Savings options should be capable of automatically considering all of these decisions.
If this is the direction of travel, then the current industry structure isn’t really fit for purpose. The recent merger activity in the asset management industry is just the start. More consolidation is inevitable as organisations race to achieve the size and scale to efficiently manage money and service clients.
Local government pension funds are starting to pool assets, and it is only a matter of time before we see consolidation of corporate defined benefit pension funds. Consolidation alone won’t solve the problem; a string of new businesses will have to be invented, and a long list of established businesses will find themselves redundant. Success will come to those who adapt.
The Government has one of the most difficult tasks. First is to establish long-term accommodative policy to support innovation in technology and financial services, and stop meddling with and moving the goal posts for the tax treatment of retirement savings.
Perhaps more difficult is the introduction of financial education into schools. Savings is deferred consumption, and can only happen if an individual has the ability to budget. Get this right, and the rest will likely fall into place. While our psychology may not be able to see or think of our future selves (Gilbert, 2007 and 2014) as the actuaries and financial planners do, we need to entrench an understanding and culture of saving at the earliest opportunity.
Looking at the influences to get us to a world where the individual has full control over planning for retirement savings – where do you sit, and what changes do you need to make?
NB: I wrote this article for the Raconteur Workplace Pensions Report that was published in the Times on 31/05/2017.