I was recently on the West Coast of North America for two events. First, a meeting in San Francisco hosted by our partners at the Aspen Institute’s Financial Security Program looking at the challenge of implementing portable non-employer sponsored retirement benefits as a mechanism to improve coverage among those left out of traditional second pillar pension systems. And then in Vancouver, for our first international defined contribution event looking at the challenges and best practice responses found in defined contribution (DC) systems around the world – an event we co-created and hosted with Aspen FSP and the International Centre for Pensions Management.
On the latter of these we’ll be producing a full event report and sharing that in due course, so the purpose of this post is not to go over the whole of the programme or what was discussed but rather to share my initial and very unstructured thoughts on the discussions. There are two observations that really stood out for me as themes from the event:
Future challenges for the delivery of pillar two pensions
The traditional mechanisms for delivering pillar-two pensions are going to come under increasing strain in the future. The workplace has been a foundational component of pension systems in the world’s largest DC markets – the US, Australia, the UK and Canada. But two trends that were discussed in the panel I chaired in Vancouver – with the excellent David John and Alex Mazer as panellists – are creating a pincer effect on the role the workplace pays. On the one hand, there is growing recognition that pension saving, especially for lower and moderate income and younger workers, is having to compete for consideration in an increasingly crowded and complex set of money management issues alongside student debt, other borrowing and the rising cost of home ownership. Employers are coming under increasing pressure to use their employee benefits offerings to go beyond pensions to support broader financial wellbeing. And, while well designed products and benefit offerings can help people to manage multiple financial goals, there is an inevitable degree of competition for where the scarce marginal pound should be directed. It’s also far from clear what the interactive effects of different behaviours are – for example, whether there is ‘crowding out’ of other saving or ‘crowding in’ of increased borrowing when we push people to save more for their retirement.
On the other hand, traditional workplaces with traditional payroll and employee benefit structures may be in decline. In the UK we know one in seven UK workers earns predominantly through non-traditional forms of employment such as self-employment, freelance work or by finding work through gig-economy platforms. Some estimates suggest that could be one in two by the middle of this century. Work is likely to become more precarious and income more volatile for many. Such trends will make ‘payroll deduction’ benefits harder to deliver even as the pressure on those benefits to support a wider range of goals and challenges increases.
In this context we discussed whether traditional second-pillar pension structures are doomed, but came down on the side of optimism. There is still clearly a role for well-governed fiduciary institutions, able to deliver at scale and therefore to act collectively to drive good outcomes for savers – Mastertrusts, superfunds, traditional employer-sponsored plans or open MEPs according to local taste. But the front end mechanisms – how people pay in and manage their savings – need to evolve to be sympathetic to new patterns of work and to enable true portability through more complex and unstable working patterns. And those institutions, directly or through leveraging their collective negotiating strength to drive innovation through partnerships with others, need to expand their horizons beyond just traditional pension products.
Demand for user-centric design and the emerging world of fintech
The way in which we (consumers and investors) interact with our money and the expectations that we have are changing. We expect greater ease and user-centric design, more individualisation, personalisation and control. It will be tempting for the traditionally slow moving pensions institutions to try to jump on board with these trends. ‘We need an app’ – a phrase we’ve probably all heard already, could become even more common. Yet pensions are low-touch for a reason. People checking their pensions account balance three times in a day when the assets are daily priced is not only pointless but potentially damaging when the number of tangible actions available in the management of one’s pension are limited and by no means universally positive.
As a sector, we can learn a huge amount from the emerging world of fintech. But which lessons we choose to focus on and adopt will be important. The value of data, the computational power available to us, the ability to automate the allocation of money between a range of financial priorities, and the importance of embedding behavioural principles into product design – these are lessons which should serve us well. But we should perhaps be applying them to, for example, making defaults smarter and more personalised rather than to encouraging ever increasing frequency of interaction by savers with their pensions when the value of that higher frequency contact is unclear at best.
There was much, much more than this discussed over the two days by a great group of panellists and participants, and we hope to build on this event to create a regular forum for this type of international discussion. For now, though, these were the issues I spent the flight home thinking about and which we’ll be considering how to build into our work programme at Nest Insight in the coming months.
Will Sandbrook, Executive Director of Nest Insight