An innovative Oxford University-backed pension provider startup should be just the sort of private markets business that the Mansion House compact wants to support. Yet for fledgling fintech Collegia the Government’s proposed £25 billion threshold for workplace schemes, designed to support UK startups, could have the exact opposite effect.
The provider will have been given some comfort from reports that policymakers within the Treasury and DWP are taking seriously the need to create carve-outs for innovators.
But Collegia’s two co-founders, Eduardo Chazan, chief executive, and Riccardo Gasparini, chief operating officer, believe the Government has got the wrong end of the stick by setting a £25bn threshold for workplace pension providers in a bid to drive the scale that will, it believes, lead to more investment in UK private markets.
Chazan says: “The people who actually make the investments usually are asset managers, right? And the big asset managers in the UK, State Street, Vanguard, AllianceBernstein, all of them have way more than £25 billion.
“And there is a very negative element in that this policy recommendation kills innovation. There is the economic theory of the maverick players, those innovators that may be small, but they force the big ones to be on the toes.”
Model disruptor
Collegia will argue that it is precisely the sort of disruptor that the UK pensions industry, and the broader economy, needs if the nation is to demonstrate it is open for tomorrow’s businesses. It originated at Oxford University, as part of the Oxford University Innovation Start-Up Incubator Facility. It still benefits from this support, with Oxford University Innovation owning some of the equity in the business.
It currently has around 3,000 employers on board, and serves around 25,000 members.
So what is it doing today that is different to what other providers are doing? Communication with members is one area in which it is innovating, using AI and internet know-how to talk to its members in the language they understand.
Chazan says: “The advent of artificial intelligence has really changed the landscape in terms of communication with members. You are able to talk to us in 100-plus languages, 24/7.”
The Collegia system is able to figure out the language people typically use on the internet and will speak to them in that language from the first communication. So how do they do this?
Gasparini says: “There are some specific cookies that you’re able to access that show their behaviour on the internet? An individual’s browser keeps up certain elements that show how they like to see things. It doesn’t identify the individual.
For certain members we’re not, not able to do this, but where their browser allows it, we try to be proactive about replying already in their language.”
He adds that overall around 10 to 15 per cent of users communicate in languages other than English, with Polish, Italian, Spanish, Albanian and Romanian being the most commonly used.
Collegia has also added some specific triggering events inside the platform through where members can ask for specific documents or actions to be performed in Italian, English, German, or any language.
“This is really part of treating customers fairly,” says Chazan.
There are no other cookies used to communicate with members, with the language one being the least invasive.
Opt-outs and AI
Collegia has identified that an area where language is particularly sensitive is around the opting out process. Gasparini says: “A lot of people have lots of doubts, and in particular, when you have staff on short term contracts that are automatically enrolled into a pension scheme, and English is not the first language, we used to have all sorts of problems. Because they don’t understand what ‘opt out’ means in their language. They will talk about ‘cancel’, or ‘get my money back’, and all sorts of things. So we had a huge element of training the AI, in all the different ways that opt out could be interpreted, and then how to translate this back to different languages.”
The second area of innovation is targeted at the smaller end of the auto-enrolment market, where employers see pensions as part of the payroll process.
Collegia identified that for many small employers it is the payroll that is the pinch-point in the process, while at the same time the cost of running the payroll for these employers is, for the provider, more than the cost of administering the pension.
So Collegia has started offering free payroll software to employers that take its pension.
“When we are just the pension provider we get the data after it’s already been processed, and the amount of errors, mistakes, inconsistencies is considerable.
“When you’re running the payroll side we extinguish these problems altogether. And then, from an employee perspective, you are able to contextualise the pension as part of the pay package, rather than that odd deduction that comes on the other side.
“As far as I am aware we’re the first in the world to do that. A bigger player, will never have the space to try to do this kind of innovation.”
Sustainable as standard
Collegia uses AllianceBernstein target date funds, as do some other master trusts.
“The biggest difference with us is that we go for sustainable as the default. So no guns, arms manufacturing, tobacco, oil and gas, pornography, alcohol and private prisons,” says Chazan: “One of the best sources of information for this was Nest Insight. Both our research and their research indicated that members don’t really feel comfortable investing in the majority of those industries that I mentioned, and that they quite like their money to do something positive, but they do find it overwhelming to then go and make a choice.”
Pot switching
For some providers targeting the snowballing DC pensions market, the business model is built around getting individual pots transferred onto the platform.
“We are seeing the majority of transfers coming in when the company chooses a different pension provider. After they have been sent the welcome pack, and the deductions are starting to be made, we then start to see engagement with the transferring of money,” says Gasparini.
He adds that Nest is one provider that makes it difficult to transfer out of, in part because it uses physical letters to communicate with people. But Collegia says Nest transfers out have been made.
Size and private markets
Collegia has been in discussions with its asset manager AllianceBernstein about implementing private markets into its default fund. But Chazan says that the Government’s announcement of a potential £25bn threshold has actually made it harder for them to access private markets, not easier, because of the lack of certainty it creates in the sector. “This policy of announcing this minimum size has actually made it more difficult to plan for increasing our presence in private markets,” he says. “It’s a sort of planning blight leading to a lack of investment in the sector. Similarly, if you’re a tech provider, you’re going to ask ‘am I going to deal with anybody? Am I going to innovate? Why am I going to bother trying to innovate if I’m going to get kicked out of the market?’”
Future AI developments
Currently on the drawing board are plans to develop the payroll and pensions software through AI, an initiative Chazan calls ‘Project Riccardo’ in honour of his partner who is developing it.
Gasparini says: “We can see an AI enabled assistant that can do as much as you can use Siri. So you can you say ‘please send £100 from my NatWest bank account into the Collegia pension. And you can do this in in German, in English, or whatever language. And on the back of this process we can start having some more and more triggering functions that allowed for the AI. For example ‘I would like to withdraw £x for the next month.”
Smart Pension had a voice-activated Alexa feature back in 2018 that allowed members to ask how much was in their pot. So how will this new development differ from that?
Chazan says: “If you look from then to today, it’s as if we came from the Iron Age to the Renaissance. The availability of tools, and the amount of things you can customise for and train for in particular, is unbelievable.”
He adds that once we have an official frontier between guidance and advice then potential for guided journeys supported through AI will be huge.
Innovation call
Chazan argues the £25bn minimum scheme size threshold proposal flies in the face of the UK’s drive to be a centre for the unicorn businesses of tomorrow.
“If they do these reforms restricting providers to those with £25bn, all these elements of innovation that we brought for the pensions and payroll would not be possible. We really try our best to innovate. And then a policy that was in theory designed to help startups innovate, to help people come from outside of the UK and choose the UK to be the place to innovate, set up new businesses and take risks, this specific policy is actually a huge impediment.
“And as we grow, one of the things they really like us to do with the pension money is add investments into startups. So my question back to anyone that thinks that pension schemes should be investing in startups innovation is, who do you think is better suited to do those investments? Those big master trusts that didn’t go through this phase, or companies that eventually succeed in getting to that stage and have the experience of building up themselves and actually selecting portfolio managers. If you think about pension schemes investing in startups, I think it would be good if some of those pension schemes were startups in the first place.”
