I spent much of last week searching the web and my network for innovative suppliers of pension administration. Googling “pension administration innovation” rendered virtually no results.
I end the week as I started it, believing it will happen but finding precious little evidence that it has,
Large parts of financial services now use distributive ledgers (Aka the blockchain to provide, more secure and more efficient processing and recording of the transactions leading to the right payments to consumers. But I see little to none of this in the front and mid-office systems of pension providers.
So pensions are still prone to manual errors whether they are paid by the state, by occupational pensions or as individual accounts (pots).
We have faster payments, open banking but we do not have much which we can properly call “pensiontech”.
I have been thinking about why pension administration has been slow to adopt the new technology and have come up with three reasons
- The complexity of the legacy
- The fear of fraud
- Lack of incentive to innovate
The complexity of the legacy
It’s well known that the UK pensions system is mature and complex. Robin Ellison has chronicled for decades how attempts to simplify rules have led to regulatory proliferation. The past is and will remain a challenge to innovators since it is now owned by the legal profession.
However, the complex interaction between state second pensions and the third private pillar has had a line drawn under it. Since 2015 we have had no further “protected rights” or GMPs to reconcile and equalise. AVCs, FSAVCs and APP1s are now all treated under one taxation system going forward. Other than in the arcane world of DB administration, a contribution is treated the same way whether made by employer, employee or under salary sacrifice.
Simplicity going forward.
Pension schemes are today much more simple than in previous times. People no longer own capital and accumulation units, a pension scheme can no longer have one charging structure for active members and one for former employees. The range of funds made available to members has also been rationalised.
The operational interface with employers has now been standardised with most contributions being received and recorded using straight through processing rather than the laborious process of the cheque and schedule.
But no technology dividend has arrived
The technology that is still considered innovative was in place in progressive schemes a quarter of a century ago. The simplification of pension schemes has not engendered a technology dividend.
In their 2018 paper paper for Y/Zen , the research institute founded by our new City of London Lord Mayor, Michael Mainelli, proposals were put forward to administer the rules based CDC scheme on a rules based engine- the blockchain. The proposal has received zero discussion among administrators including progressive trade bodies such as TISA and PASA.
I have brought the subject up at several conference since then, but whether we talk about the new simplified DC , whole of life CDC or decumulation services, I have seen virtually nothing coming from pension administrators.
Commenting on this blog, Richard Smith writes
My hope is Consume Duty-compliant, commercial Qualifying Pensioni Dashboards will shine a light on admin like never before, highlighting decades of under-investment by many trustees and providers, hopefully driving up consumer pressure you say is lacking.
Dashboards may drive some investment but I suspect that until administration fees are charged on an ad valorem basis, administration will continue to sit at the bottom of the value chain. No new players will invest on that basis.
Where innovation has happened it has worked
There has been some innovation , but it has been low-profile. Pension Bee have built their acclaimed customer service proposition on salesforce which efferently deals with all aspects of pension administration including the member interfaces.
Stefan Lundberg, writing on this blog, asks
So what are the recommendations for policy makers? With the risk of sounding like an economist, the simple answer is that it depends.
Centralised administration requires the government to set up and operate an effective administration business. The decentralised ledger requires standardisation and access to a vibrant start up scene. In practice, there is a range of solutions between the two extremes, so each country has to find a solution that works in their specific situation. In the long-run,
I expect the decentralised ledger to gain ground but until then it might be an idea to focus on improving the public digital infrastructure and explore a centralised ledger.
So what is stopping more?
The fear of fraud has frightened many administrators away from automatically actioning transactions. The complex system of red and amber flags has reduced the pace of transfers at a time when “faster payments” is the mantra elsewhere.
What concerns those on the wrong side of the flags is that such a high proportion of the referral to Maps , give no reason for the referral. This frustrates those trying to combine their pots. It also brings the administrative process into disrepute.
Manual intervention is on the increase at a time when artificial intelligence is elsewise becoming the means for decision making. Typically, the excuse for delays is to protect the member from self or third-party harm.
Following the complexity of the legacy and panic over saver safety, the third impediment to innovation is the lack of incentive to change.
This final reason is hardest to understand. Hardly a month goes by without me being asked to comment to overseas administrators about the opportunities to new entrants to third party administrators in the UK. Despite many inquiries, I have yet to see any new entrants.
Blocking change is the vested interest of the insurance industry who continue to use legacy software and patched up service centres that have not recovered from the disruption of the pandemic. Rather than adopt new processes , as promoted by TISA, STAR and most lately by Via Nova, insurers have backed Origo beyond all merit offered by that organisation.
Where innovation is likely to happen is not in the insurance section but amongst master trusts who are increasingly looking to the future. But even they find themselves bogged down by inertia. The big Government initiated projects have all run into technology problems. Nest has lost several years progress by its aborted partnership with ATOS, the small pot consolidation project has made little progress in four years while the Pension Dashboard continues to eat resource while delivering nothing in return.
The harsh judgement on workplace pensions is that they are far too comfortable a place. With employer apathy and little consumer pressure, auto-enrolment has become something of a gravy train. The demand by Government for small schemes to consolidate will – it seems- be chieved through levies on small schemes rather than through improvements in net returns and the member experience from large workplace pensions.
What is stopping more innovation is a failure to put adequate pressure on incumbents. That ultimately is a failure of competition.
The Pension Regulator has started to talk of improving administration standards , but it has very little power to intervene and improve.
Will central Government take up the challenge? I think it unlikely that they will go for another centralised project such as pension dashboards.
Stefan Lundberg, writing on this blog, asks this too. Concluding that the dashboards will be the immediate preoccupation.
So what are the recommendations for policy makers? With the risk of sounding like an economist, the simple answer is that it depends.
Centralised administration requires the government to set up and operate an effective administration business. The decentralised ledger requires standardisation and access to a vibrant start up scene. In practice, there is a range of solutions between the two extremes, so each country has to find a solution that works in their specific situation. In the long-run,
I expect the decentralised ledger to gain ground but until then it might be an idea to focus on improving the public digital infrastructure and explore a centralised ledger.
Great insights into the current state of pension administration and its slow adoption of new technology. It’s interesting to see the challenges of legacy systems, fear of fraud, and lack of incentive to innovate. Hopefully, with increased pressure and competition, we’ll see more advancements in this sector soon. This article provides valuable analysis of the obstacles hindering innovation in pension administration. It highlights the need for change and the potential for improvement in this industry.
Interesting article and I would largely agree with the sentiments herein but with a few caveats or observations:
Firstly Pension admin systems are big systems with high expectations around both functionality and maturity which tends to discourage new entrants. There are also economic pressures that limit the ad valorem correlation to the cost of providing and maintaining them, especially when compared to more “limelight” software industries. Also most of the simplicity has been layered over the top of the complexity so hasn’t resulted in any real reduction in complexity. CDC on the other hand does represent something of a green-field opportunity for doing things in a different way, but unless there is sufficient momentum to attract significant investment in new platforms to support it, it will inevitably just be bolted onto existing admin platforms and practices.
Comparisons to FinTech are also questionable, given that much of what exists there is either vapourware or has seen the limitations of “proof-of-work” approaches and how inefficient and unscalable they are. I would therefore question the statement that large parts of financial services use distributed ledgers in any meaningful sense. Most applications of DLT are technology looking for a problem – and not one that can be solved for the longterm, instead tempting fast-buck approaches to the market. “Proof-of-stake” may help for a time here but the likely trend for that will be towards centralisation of those ledgers. The majority of the improvements you have cited are good ol’ fashioned REST API endpoints and the forced opening up closed systems such as banking networks to allow new players.
Pensions Dashboards – when they finally land – will shine a spotlight on much of this and hopefully create a better value proposition for pensions admin although this cannot be at the cost of piling on additional costs onto member’s benefits. New business models for providing these services are where there exists real opportunities for innovation I would say.
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