We are putting too large a trust in technology to manage our pensions.
The brave new world of Fintech may give us the pension dashboard, pot aggregation and robo-advised spending mechanisms, but are we ready for self-empowerment?
In this article I argue that behaviourally we still cling to fiduciaries, whether employers, advisers and trustees. We seek safety in numbers and still demonstrate strong collective tendencies.
While Hoxton Square’s digital garages are humming, many ordinary people still have conventional mind sets; they want money for a rainy day, a replacement income as they leave the workplace and the security that there will still be money however long they live.
To a greater extent, the revitalised state pension is meeting this conventional need. But the mass affluent and even those just managing, aspire to more than £155pw. They want a simple contract that links what goes in to what comes out in an explicable way. The link between earnings and pensions has worked for generations through defined benefit schemes. The failure of SERPS and S2P was largely down to a failure to explain how the pension related to earnings.
Defined contribution pensions, initially made this link explicit. The guaranteed annuity contract promised that for every ten pounds saved, one pound of pension would be paid. This 1 for 10 rule of thumb, was echoed in a 10% growth rule. The good years evened out the bad years so you could confidently expect 10% growth on your pension pot. I advised a lot of people in the eighties to think of 10 as a sensible number.,
But people retiring today have no expectations of what to do. Even the 4% rule, which allowed you to divide your pension pot by 25 to get to your “safe” level of income, has recently been debunked by Aegon. Instead of expectations, we have technology. We will have the pensions the algorithm tells us, depending on our stated risk tolerances.
This idea that we get what we want through technology Is hugely attractive to regulators, providers and most of all to advisers since it makes a safe haven of the algorithm. The risk of something going wrong has been mitigated by the abolition of manual process, we have effectively outsourced blame to a digital process.
But it is this contract with an algorithm that has yet to be tested. I suspect it is a flawed contract for the consumer. For ordinary people do not contract with algorithms but with other people. A friend of mine, who is an adviser, was recently asked by a client if she was right. She said she knew she was not right, she expected to be wrong 100% of the time. 50% of the time she would be wrong in one direction and the other 50% in the other. She told her client that the best he could hope for was that she wasn’t ever very wrong!
I’ve had this story verified by the client who was much comforted by the honesty! Infact, the idea of being wrong all the time underpins much actuarial science. It’s the basis for “best estimates” projections. The actuarial approach to managing risk is to pool data and use statistics to give likely answers.
I suspect that I am not alone.
The answers are the same whether you feed them into an algorithm to robo-manage an individual pot or run a 100,000 member defined benefit scheme. The only difference is in the margin for error. If you have a huge pool of people, you can reserve and distribute on a discretionary basis (the idea is called smoothing). If you are managing an individual pot, you have no margin for error, the sequential risks associated with individual drawdown cannot be managed through individual models. The work of Finalytiq is gradually coming to this conclusion!
I am one who at 55 is looking at my options. For me, the attraction of robo-advice is abstract but its risks are demonstrable. I cherish the fiduciaries who offer me certainty – the Government Actuary who ensures that my state pension will be paid, the trustees of my defined benefit scheme. I have a pot of money in a pension which I could hand to a financial adviser or a robo-adviser, but I won’t.
For like many people I know, I have no trust in technology to overcome the issues I see in a market driven individual drawdown approach. I would like to take the step and contract with one of the bright e-vestment organisations that I talk with when at work. But my heart is elsewhere, I am still emotionally attached to collective solutions providing me with greater certainty.