Q&A: Technology powers the path to sustainable retirement income

Auto-enrol­ment has helped fuel the rise of defined con­tri­bu­tion pen­sions. How have the ways in which employ­ers deliv­er these schemes to employ­ees evolved?

There has been a sig­nif­i­cant shift from group per­son­al pen­sions and trust-based pen­sion schemes towards mas­ter trusts after reg­u­la­tion made the for­mer more oner­ous. Mul­ti­ple non-con­nect­ed employ­ers use the same mas­ter trust envi­ron­ment and it’s a com­plete­ly out­sourced ser­vice. Even the gov­er­nance is out­sourced to third-par­ty trustees, so there’s no deci­sion-mak­ing by employ­ers oth­er than which mas­ter trust they use. They just pay across their con­tri­bu­tions. A cou­ple of years back there were prob­a­bly about 100 mas­ter trusts, which The Pen­sions Reg­u­la­tor said was too many, and some weren’t par­tic­u­lar­ly well run, so it intro­duced an autho­ri­sa­tion process. This not only reduced the mar­ket to around 30 mas­ter trusts, but also ensured employ­ers and pen­sion scheme mem­bers can receive a very pro­fes­sion­al ser­vice with good pro­tec­tions.

How does the expe­ri­ence of retir­ing through a defined con­tri­bu­tion scheme con­trast to that of a more tra­di­tion­al defined ben­e­fit scheme?

It’s much more com­pli­cat­ed, which will be high­light­ed in the next five or ten years when the first peo­ple with only defined con­tri­bu­tion ben­e­fits to rely on reach retire­ment. With defined ben­e­fit schemes, you get what you are giv­en. There is no flex­i­bil­i­ty, but a lot of cer­tain­ty. With defined con­tri­bu­tion, you have to make the deci­sions about how you take your ben­e­fits your­self. There is a lot more free­dom about what you do with your pen­sion pot, but also risk that you might run out of mon­ey ear­li­er than had you not had those free­doms. You have to think about how long you are going to live, how much mon­ey is in your pot, how much should you draw from it each month or quar­ter, how long that will last and where to invest your pen­sion to pro­vide a sus­tain­able retire­ment income. They’re real­ly dif­fi­cult, com­plex deci­sions and most peo­ple don’t have the knowl­edge or expe­ri­ence to work it out for them­selves. The risk brings uncer­tain­ty and uncer­tain­ty can bring iner­tia. Indeed, the biggest action we’ve seen peo­ple take at retire­ment, in the first few years since pen­sion free­doms were intro­duced, is no action.

What is required to pro­tect mem­bers and ensure they are using pen­sion free­doms to their advan­tage rather than dis­ad­van­tage?

Put sim­ply, tech­nol­o­gy. And we’ve been on our own jour­ney in recent years to help sim­pli­fy and improve the whole defined con­tri­bu­tion expe­ri­ence for pen­sion scheme mem­bers. We start­ed with mod­el­ling tools, where­by you put in the pen­sion val­ues you have col­lect­ed from dif­fer­ent places through your work­ing life, along with your pref­er­ences and risk lev­el, and it cal­cu­lates your income poten­tial. But we realised we need to do more.

What tech­nol­o­gy specif­i­cal­ly enabled you to take a more sophis­ti­cat­ed approach?

Open bank­ing. We devel­oped an open bank­ing app that sits along­side our mas­ter trust and, if you want to use it to its fullest extent, you link it to your bank accounts to aggre­gate not only your income but your expen­di­ture too. The app builds a pic­ture, over a peri­od of time, show­ing the income you need to sus­tain your life. Giv­ing some­body that kind of intel­li­gence, in an engag­ing mobile app, is much bet­ter than ask­ing them what they think they will need, which most peo­ple strug­gle to answer. We’re deliv­er­ing to mem­bers the answers we always want­ed them to put into the mod­el­ling tools, but were nev­er cer­tain they would take the time to do. By tak­ing the infor­ma­tion cap­ture ele­ment out of their hands, we can seam­less­ly deliv­er valu­able insights on how much income they need against their pen­sion, what we think they need to draw down each month and what age it will last them until. It has been a real­ly use­ful step for­ward.

How do you intend to sim­pli­fy people’s retire­ment jour­ney even fur­ther?

In the past, you have always had to send an instruc­tion to your pen­sion provider say­ing you want to draw down, say, £1,000 a month, which is paid until you say you want a dif­fer­ent amount or you want to stop it or you die and the ben­e­fits are passed onto those who sur­vive you. We don’t know whether mem­bers are draw­ing too much or too lit­tle, so we think there’s a bet­ter way. Using the infor­ma­tion that’s in that open bank­ing app, we can set a rule that says you don’t want the bal­ance in a bank account to fall below the amount that cov­ers all your essen­tial out­go­ings. Every time it then looks like it’s going to fall below that amount, the app sends a mes­sage say­ing you need to draw a lit­tle bit more from your pen­sion scheme. Not only do you only draw down the amount of mon­ey you actu­al­ly need to pro­vide for your­self, but it also means you won’t find your­self in the sud­den posi­tion where you for­get there’s an insur­ance pre­mi­um or a tax bill that needs to be paid and there isn’t enough mon­ey in your bank account to cov­er it. Of course, we also know a lot of peo­ple suf­fer from cog­ni­tive decline with age, which adds to the com­plex­i­ties of mak­ing finan­cial deci­sions, so we think the app can take some of those dif­fi­cul­ties away, avoid­ing unnec­es­sary risk or dis­tress.

How do you see the pen­sion land­scape play­ing out in the com­ing years?

There is a big wave of peo­ple that arrived into the defined con­tri­bu­tion pen­sions envi­ron­ment in 2012 as part of auto-enrol­ment and who may already be com­ing up to retire­ment now. We are tak­ing all the knowl­edge we gained from being part of the defined ben­e­fit envi­ron­ment and we are try­ing to build it for indi­vid­u­als in a defined con­tri­bu­tion space, with the added bonus of pen­sion free­doms. That’s the kind of expe­ri­ence that the defined con­tri­bu­tion gen­er­a­tion will get, which is com­plete­ly dif­fer­ent from the expe­ri­ence those who have already gone through retire­ment received over the last five or ten years. It’ll be a world apart and ulti­mate­ly it is tech­nol­o­gy led.

For more infor­ma­tion please vis­it seic.com/en-gb/solutions/master-trust

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