I met this fellow yesterday on the road to Pitlochry

I’ve just read yesterday’s press release from PWC’s Jonathan Howe commenting on the pension reform announced in this year’s budget.

“There is no doubt that the changes present very significant challenges to life insurers with a heavy reliance on annuity business, but many are already taking a glass half full approach. Yes, there will be losers, but opportunities exist for those who develop innovative new products and services for customers. Those who retire will still need investment options – they will need to make investment decisions, for an appropriate yield, for the rest of their lives. We believe despite short term pain life insurers can have long term gain. After all, there are thriving life insurance industries around the world without compulsory annuity purchases.

“Whereas an annuity is sold once, with a new range of products, potentially required at different stages during retirement, there are likely to be many more touch points with customers, increasing engagement. The increased flexibility of the rules should also increase the number of people saving in pensions, which will now provide a savings vehicle with few limits. With contributions also paid from pre-tax salary, this could effectively replace ISAs as the choice of saving vehicle for many.

“All of the opportunities for innovative new products go hand in hand with a need for life insurers to focus on their customers and align their digital strategy with their customers needs. In our view the changes announced in the budget will accelerate the urgency of this need.”

The highlight is mine and refers to a concept that has been gestating in my head for a few weeks.

If you were to flip a conventional pension savings product through 180 degrees you would have the pension decumulation product of the future.

Substitute for regular contributions, regular payments; for lump sump contributions, lump sum payments and contribution caps , withdrawal caps and you have the basic architecture of a personal pension in payment.

The customers are distinct, there is now no employer involved, the relationship at an operational level is between a fund and a bank account with a payment system being the single interface.

Theoretically, the policyholder determines the timing and incidence of payments but it’s clear that guidance (if not advice) will be critical. It would be as irresponsible to put someone in control of their retirement fund without some initial competence training as to put someone at the wheel of a sportscar without a driving test. It is not just the drive who gets hurt in  a car crash.

But returning to Jonathan’s statement, I am struck by the emphasis on this being a digital strategy to focus on customer’s needs. Almost by definition, the target group for this new kind of payment system will be those young enough to be competent in managing matters digitally.

Whether this be the highly sophisticated modelling tools increasingly available on provider and intermediary websites or the crude but effective “sliders” advertised by the payroll lenders, most people are familiar now with financial modelling using digital tools.

The kind of questions people will be asking- “what does this do to my tax position?” , “will this impact my benefit claim?”, “when will my money run out”,  “what buffer am I building up to pay for long-term care?” can all be answered using modellers.

Some of these answers are based on knowns (tax and benefits) and some on assumptions (investment growth, inflation and longevity).

Some of the answers will involve doing nothing (keep calm and carry on) while others will involve taking definitive action- perhaps insuring longevity through an annuity, pre-purchasing rights to long-term care, increasing or decreasing risk within the investment fund.

All of this can be managed digitally though a dashboard that provides information to the individual on funding, year to date drawdown payments, headroom before the next tax-threshold and the status of hypothetical reserves (sinking funds).

None of this is beyond the capacity of insurers ,especially those who already run flex and financial education sites. Indeed the massive investments in corporate wrap may even be justified in terms of useage in managing  in-retirement spending.

What this manifestly is not about is telling people what to do. While operationally people are going to have to do a lot of the management themselves, restricting choices by setting limits is not going to work. People need to be free to make their own mistakes and insurers must not be liable for poor decisions. There is a duty of care but it is delivered in information boxes via hover buttons, it is not hard coded into a rulebook

So the key areas of expertise will be

1. Pensioner Payroll
2. Financial Modelling
3. Behavioural Finance
4. Financial Advice/Guidance.
5. New technologies (APIs, Apps,messaging)

The areas we will be moving away from are

1. Compulsory guarantees
2. GAD limits
3. Distribution allowances (commissions)
4. Historic compliance controls

The critical success factor will be as Jonathan so ably puts it

for life insurers to focus on their customers and align their digital strategy with their customers needs

This article originally appeared in http://www.pensionplaypen.com/topthinking