Good morning, I’m Jo Hill.
I joined TPR last year as Executive Director of Strategy and Risk. Prior to that I was responsible for Strategic Analysis, Consumer Insight, Regtech and the delivery of data strategy and operations at the FCA.
Which is to say that I’m a nerd.
With an interest in policy development, the shape of the future and the role of regulators in guiding its course.
This morning I’m going to do something unusual for a regulator. I’m going to speculate. I’ve been asked to try to imagine the future of pensions. I’m not confident enough to call this a prediction, but my thoughts will be informed by my experience in regulation; so let’s consider it a forecast for us all.
Regulators are not generally characterised by our ability to gaze into a crystal ball. We are most often bringing policy to life, enforcing existing rules and protecting consumers.
In creating my role, TPR has recognised a need to look further ahead and consider a broader financial landscape. This morning I’ll be trying to tease out some of those threads and weave a broad tapestry.
I have a young daughter, she’s seven. When she asks me what I do for a living I tell her I work in an office. That seems to satisfy her curiosity. Most of her friends’ mums do the same.
I tried to explain my job, but we got stuck on the concept of a pension. The nearest mutual appreciation was ‘money for old people’. Something to do with finishing work. I thought for a seven-year-old this was a reasonable grasp.
In 2015 the Money Advice Service carried out a ‘Financial Capability Survey’ looking at the UK. It discovered that my daughter was far from alone in having trouble with financial concepts.
Four in ten of us can’t manage our money. 16 million working age people have less than three hundred pounds in savings, and eight million of us are in serious debt.
People in the UK seem able to manage their money day to day, but are far less prepared for events like income loss, bereavement or retirement.
This lack of appreciation should be a concern for our industry; it is a concern for TPR because making sure that pensions are well run is only part of the equation for those looking to secure an adequate retirement.
If that weren’t enough, recent research by Nationwide suggests many of us are hugely underestimating the cost of retirement. Making neither adequate provision or harbouring unrealistic expectations about the lifestyles they might enjoy. Presumably basing our expectations on the well-funded retirements enjoyed by our parents rather than sitting down with a qualified advisor.
The research found pensioners require an average of £885 a month to meet essential living costs. Nearly four hundred pounds a month more than the state pension. However one in three people in middle age are set to retire on state pension alone.
Many are worried about being able to afford retirement and fewer than one in ten have clear retirement goals.
So in thinking of the future, my initial concern would be to better connect people to their finances. And in doing so, help people feel more confident and able to make informed decisions.
From our perspective we’d be interested in their connection with their pension. Despite the success of automatic enrolment, some people remain disconnected. They feel pensions are for ‘later on’; they seem to be something that happens automatically. They’re something to do with the government or an employer, so don’t need personal attention.
The DWP recently released research that demonstrated how few people realised their automatic enrolment contributions would be increasing in this year. It seems even very basic information is either ignored or considered unworthy of attention.
I could be generous and say that given the many pressures in day to day living it’s an excusable attitude. We are all aware though that when it comes to pensions the devil really is in the detail. Our industry need to address this disconnection. Better appreciation leads to better outcomes.
Pensions need to be less opaque and more relevant. People aren’t interested in the inner workings and quite frankly they don’t need to know. It would come as a revelation to many to learn their pensions are managed by people called ‘trustees’. They’d be even more baffled to consider the idea of a ‘scheme return’ or ‘chair statement’.
But they should at least know the value of their pension, the kind of retirement they can expect and what options they might be presented with as they approach the end of their working life. The strongest link most have to their pension is noting the contribution made when or if they check their payslip.
If we are going to better connect people to funding for their retirement I think we need to seriously consider how they access information.
My daughter lives in a digital world. Information is fluid, mobile and accessible in real time. Paper-based communication wouldn’t keep pace with her expectations.
She and I can go shopping using a mobile phone. I can do my banking, order a cab. Why can’t I access information about my pension there? An annual paper statement just doesn’t cut it anymore. It doesn’t encourage me to keep tabs or interact. In fact it’s most likely it’ll get filed away and never looked at again. Not the greatest way to nudge me towards planning ahead.
I want things to be different for my daughter’s generation. By the time she’s able to pay into a pension, technology will have changed. I’m hopeful she’ll be accessing information in real time, as and when she wants it.
Whether it’s the pensions dashboard or an app developer providing a tool via ‘gamification’, change is coming and its coming fast.
Each generation experiences a unique set of circumstances. An interplay of cultural, social and economic elements that shape and colour lives.
With hindsight we have learned that Baby Boomers appear to have lived through a golden period in relation to pensions. Well-funded DB provision, bolstered by a stable economy.
Their children, ‘Generation X’, are facing a different set of circumstances. DC pensions fluctuate in value as the economy flexes in relation to global events.
And consider the circumstances for Millenials. They seem ever more precarious.
Michael Johnson of the independent think tank ‘Bright Blue’ lists their challenges as ‘unaffordable housing, earnings and productivity stagnation, zero-hours contracts, relatively thin defined contribution pension provision, plus a defined benefit desert in the private sector, and a retreating State Pension Age’.
That’s his take on ‘Intergenerational Fairness’. Research from Merrill Edge in September 2017 suggest that mindful of these challenges, Millenials are choosing to do life differently.
Rather than planning for retirement, they appear to have scanned the horizon and decided quality of life now is better enjoyed than trying to plan for an uncertain future. The Merrill research shows that 63% are saving for lifestyle goals. A marked difference to the 45% of generation Xers and Baby Boomers who consider lifestyle a factor.
In terms of their retirement planning just 37% of Millenials are planning compared to 55% of Xers and baby boomers.
These are circumstances that impact our industry. Each generation wave demanding new and different responses.
Millenials, alongside the particular issues Michael Johnson identifies, will also be supporting an ageing population; funding the rising cost of health and social care. What happens to pension provision? We’ve already seen the age for state pension rolled back to take account of the cost.
We should also be mindful of actual levels of pension provision and the expectations of those closer to retirement. In its 2017 survey of the financial lives of UK consumers, the FCA found that ‘38% of non-retirees have no private pension provision. 29% of non-retirees aged 45 and over expect the State Pension will be their main source of income in retirement. 44% of non-retirees aged 45 and over think they will be worse off in retirement, with adults in the South East (52%) particularly downbeat about their future living standards’.
A lack of financial awareness, intergenerational inequality and patchy provision. Pull those threads together and that creates quite a challenge for our industry.
But is an exciting one. One I think we can address.
We’re already making better use of data to address some of these issues. A gold rush of digital information influencing policy, intervention and strategy.
We’re already finessing an increasingly sophisticated market. The authorisation of master trusts being just the latest in a line of innovations, following AE and those 10 million beneficiaries.
We are already looking ahead; perhaps not far enough, but further than we’ve looked before.
Let’s put this in context.
Pensions are a relatively recent phenomenon. In his recent book ‘Enlightenment Now’, Steven Pinker reminds us that it wasn’t that long ago that the average person had two stages of life; work and death. There was no retirement.
Pensions emerged and evolved in reaction to healthier and longer-lived lives. Providing people a way to live in comfort and avoid penury in older age.
The idea of retirement and a pension to support that retirement are very recent. Our industry has changed every time society has shifted. Sometimes pre-empting change and sometimes reacting to it.
Notwithstanding the issues I’ve already sketched out, climate change, political volatility and fluctuating markets also have an impact.
We do however have a way of addressing these entwined challenges that was not available to our forebears. I referred to it a as a ‘gold rush’ a moment ago.
Data. Information available in an unprecedented scale and scope. Whether it’s from publicly available data sets, scheme returns or information harvested from online activity.
The potential of data is enormous, but as an industry we are just beginning to appreciate what it could mean.
Trustees and administrators will have heard us talk at length about ensuring the quality of data and the importance of good governance. We have talked at length about our record keeping expectations and we expect compliance. Quite apart from the fact that being diligent is a good thing, the data submitted to us is used for far more than imply checking adherence to guidelines.
Data helps us deploy resources. It helps us develop policy and it guides us to areas of regulatory interest.
The pensions dashboard will succeed or fail on the quality of the data used to populate it. Those phone-based apps I dream of will rely on data and inventive deployments of it to change savers behaviour.
And though the knots of financial capability, intergenerational fairness and unfunded promises won’t be undone by data, they will be untangled.
We also are experiencing huge leaps in technology. The ‘techsprints’ and seminars that bring together innovators, regulators and business demonstrate that there is an appetite and ability to address issues.
Regulatory and financial technologies will be vital in exploiting data. Smart, efficient tools that enable our industry to interrogate and make sense of the masses of information available.
Our industry is bursting with possibility. The potential of RegTech and FinTech are enormous.
We are also experiencing sustained political interest in pensions. Governments have long been wise to ‘pensioner power’ and this is unlikely to alter. I think our industry is likely to experience concerted and continued political interest. I view this positively. Better to be held to account and questioned than ignored.
Opportunities don’t just stem from addressing current challenges or failures. There are also positive opportunities to improve or create. As new markets emerge, new regulatory approaches are required.
Advances in regulatory technology, with clean data and algorithms powerful enough to predict problems and we face a future far brighter than we might currently imagine.
Joint working between regulators will be vital, building on projects like our joint strategy and work programme with the FCA, and this includes opportunities to work with the Money and Pension Service on addressing some of those capability issues that I mentioned. But regulators and government bodies don’t hold the keys to all the answers - collaboration with the industry will be vital if we are to address the future. This is easily said and I wonder if we – the Pensions Industry – are willing and able to put theory into practice?
I see the future for pensions as one of creating a clearer, smarter more accessible realm. As a place of challenge and innovation and one I hope the industry is ready to embrace alongside regulators.
So what will my daughter find when she starts saving for her pension?
My hope is that she’ll find an easy to understand pension system. One that provides her with tools to help her understand her personal position. A system demystified and streamlined, that has taken account of its social context and offers realistic and real time information.
I see a bright and engaging future for pensions.
And one day I hope my daughter will understand why it is I love what I do.