The UK pensions landscape is at a pivotal moment. The Mansion House reforms announced earlier this year are set to usher in a move 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 presents pension providers with a significant challenge. Private assets usually incur significantly higher entry costs than public equities, and can easily be 20 times the cost of passive equity trackers.
Defined contribution pension funds are currently, on average, investing under 1 per cent of their assets in unlisted equities. Increasing that to 5 per cent by 2030 without raising charges for pension holders is a significant hurdle given the substantive difference in entry costs. Simply put, investment budgets will need to increase.
Pension providers must 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 – and this has a much higher cost than it needs to. Recent DWP analysis shows administration costs per member vary from £15 to £75 per year 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 industrywide technological upgrade, away from legacy systems to cloud-native platforms that represent better value.
What might this mean in practice? Providers and administrators need to leverage advanced digital systems to improve operations, saving themselves time and money. Pension record-keeping, which involves efficient processing of contributions, investment, unit reconciliations, claims and member data, is one area that could significantly benefit. This is a traditionally time-consuming and intensive task, prone to human error and inefficiency and requiring a considerable amount of human expertise. Digital automation can streamline these processes, lowering costs and passing 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 simplify routine enquiries and transactions, providing substantial cost savings. Done well, this improves the overall customer experience by making it faster and more engaging.
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 demand a streamlined administrative system and a robust, centralised infrastructure and a clearing house to manage individual pots and pension contributions across various different providers and employers.
Enhancing member choice would push providers to focus on marketing and customer experience that stands out. Whilst workplace providers will naturally be concerned about the potential for retail 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 see opportunities here, not just threats. This does though underscore the need for greater industrywide digitalisation.
The winners and the consolidators will be those that invest in their underlying technology ahead of the coming changes — not only to avoid passing higher entry costs to members but also to ensure we are equipped for the demands of a rapidly evolving financial landscape.
