Improving pensions adequacy: is personalisation the key?

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If default pension contribution rates are insufficient, could technology help to tailor rates more to individual needs? 

Recently I attended an international pensions conference, where the UK’s pensions system was once again cited as a trailblazer. This was largely due to the reforms introduced following Lord Turner’s Pensions Commission (from 2004–5) – most notably the introduction of auto-enrolment from 2012 onwards.

These changes were groundbreaking and have benefitted greatly the UK. However, the thinking that led to them is now nearly 20-years old. 

Since then, society has changed, technology has reshaped our lives and customer expectations are very different. And despite the success of auto-enrolment, many workers in the UK are not saving enough to give them the income they want and need in retirement. 

Half of defined contribution pension savers are not on track for the income they expect, found modelling by the think tank, Phoenix Insights, which is part of Phoenix Group. This equates to around 14 million people.

So what needs to change, and how?

 

Emergency savings

The lowest default contribution rate should be 12%, rather than 8% – according to almost nine-in-ten (87%) industry figures polled at a recent Standard Life event.

I strongly support this drive for saving more. But the optimal saving rate for any individual depends on a range of personal, financial and contextual factors, like income, competing financial demands, other savings, debt, family circumstances, future aspirations, likely career trajectory and so on. It’s a complex issue, and the answer is highly individualised.  

For some workers, particularly lower earners, the rationale for saving more in a pension should be balanced against the need to create short-term financial security. 

Many people in the UK do not have enough liquid savings to protect them from even minor short-term financial shocks. This can lead to debt spirals and affect health, productivity and earning capacity. For these people, rather than increasing pension contributions, the next available pound would be better used to create an emergency fund. 

Pension saving cannot be divorced from savers’ other financial needs. The audience at the same Standard Life event were asked, if the government decided to increase pension contributions to 12%, should the extra 4% go towards pension savings, or a choice of pension and other savings? Most (58%) opted for the latter. (For Standard Life’s view on the 8%–12% debate, see Auto-enrolment: what’s the cost of not increasing contribution rates to 12%?.)

The Nest Insight Unit has trialled the extension of auto-enrolment into emergency saving. This has boosted saving levels to more than 70%, with workers stating overwhelmingly (more than 93%) that they like the scheme. 

In these trials, technology is used to give the saver a lot of control: they can change the amount they save, and quickly withdraw money when they need it. Individual choice is preserved while making it easier for people to get started with short-term saving.

 

AI and big data 

Since the Pensions Commission, technology has advanced massively, our ability to understand data is much better, as is the potential for personalisation. 

So what could this mean for the next phase of auto-enrolment? Could we create a system more tailored to the individual? 

Recently Professor Shlomo Benartzi, one of the world’s leading behavioural economists, posted an article on LinkedIn showing how artificial intelligence (AI) can be used to leverage mental accounting and create a highly personalised user experience for annuity purchase. 

Perhaps this shows the way forward for other aspects of pensions, enabling us to create a series of nudges that are geared towards an individual’s particular needs and preferences? 

Could we leverage the growth of “big data” and AI to create personalised individual savings plans? And could we empower the consumer by giving them access to their own data, including behavioural data, enabling them to adjust their own defaults for financial products and services?  

Above the statutory minimums, the level at which people save, the balance between pension savings and other forms of savings, and even the rate at which contributions increase, could be based on individual needs, or informed wishes, rather than a one-size-fits-all approach.  

We have reached the point where technology and the dawn of the pensions dashboard may permit guided options during saving. Meanwhile, the use of digital open finance, where the UK drives a lot of innovation, might provide greater financial literacy and engagement. 

Additionally, we have a new government – with a mission to tackle financial inclusion.  

The Labour Party recently set out its plan for financial services, including its intention to create a national financial inclusion strategy, and for the UK to become a global standard-setter for the use of AI in financial services.  

A new pensions and savings settlement, powered once again by a partnership between government and our industry, could play a major role in delivering this bold ambition.