Invention is the mother of necessity

While these regulatory changes provide opportunities for new products and increased customer engagement, the immediate impact for providers will largely be related to the reduced revenue from fees and squeeze on profits.

Consumer confidence in financial organisations has been hit hard by the financial crisis. A recent Gallup study found Americans trusted big-tech companies more than banks when it came to providing financial products. A similar survey by YouGov suggested that 24 per cent of UK residents would be likely to be banking with PayPal or similar service in the next two years.

These surveys, and a look back at failed businesses from other sectors, suggest incumbents tend to overestimate the value of brand loyalty and underestimate the willingness of consumers to trust new businesses.

Consumer behaviour

People are not only working longer, with the number of people set to work past the state pension age continuing to grow; they are working differently. Self-employment is on the rise and job tenure looks likely to decrease further. These changes impact how we view and manage our retirement, in turn leading to new requirements for the products and services we use.

The danger for incumbents is that they ignore these changing needs, allowing the gap between the service they offer and the service desired by their customers to grow.

The widespread uptake of digital services, driven largely by increasing smartphone adoption and broadband coverage, has led many consumers to view digital channels as an essential part of the way they run every aspect of their lives. It is therefore not surprising that the digital experience provided by services has become a major factor in determining user retention.

People are not only working longer...they are working differently

Unfortunately for pension providers, whose services tend to revolve around annual paper-based statements rather than responsive websites, consumer expectations are not being set by other pension providers but by the other services they use on a daily basis, services such as Facebook, Uber, and Gmail.

Failure to provide a similar level of user experience is likely to lead to dissatisfied customers and the risk of increased churn.

Technology

Improvements in the power and availability of technology, combined with different ways of working, mean it is now possible for very small teams to create services that scale to support large numbers of customers in incredibly short timeframes.

A five-step plan for existing pension providers to future proof their businesses

1. Get the foundations right

Like many large, established financial service institutions, pension providers have ageing legacy infrastructures and, perhaps more importantly, legacy organisational cultures.

In order to reduce cost-to-serve: income ratios, and provide the digital first experiences desired by customers, pension providers need a platform that allows them to make changes to their services in weeks, not years. Although challenging, this should be viewed as an achievable target.

While a large part of this is making sure the technology is fit for purpose – no small task in itself – it is also critical to update the organisation’s processes, people and governance model at the same time.

2. Build customer-first experiences

With the expectation that more customer interaction with pension providers will be through digital channels.

Creating great customer experiences requires an unrelenting focus on users’ needs and behaviours. That means analysing behaviour through the extensive use of analytics, running regular user research and testing sessions, embedding design principles across the business, and then using this data to drive decision-making processes.

3. Provide connected offerings for lifelong wealth

Many people have changed the way they think about retirement: it has gone from being a single event to a process. With this shift in perspective, the current separation of pensions from other savings and investment activities appears artificial and unhelpful to consumers.

It follows that the integration of pensions alongside other wealth management services should be viewed as both inevitable and desirable.

This integration has already started, with wealth management platforms such as Nutmeg and Betterment offering pension products. More interesting integrations are almost certain to follow: for example, pension pots could be linked to automated saving services such as Digit and payroll-based budget management tools such as Squirrel.

4. Offer Radical transparency

The 2014 Pension Act mandated increased transparency from pension providers in relation to their fees, and guaranteed impartial advice for customers. While both of these changes are welcome, there is room for pension providers to go a lot further.

A recent study by the National Association of Pension Funds suggests widespread mistrust of the industry and concern about people’s ability to effectively plan for their retirement, specifically:

● 47 per cent worry people will be mis-sold unsuitable retirement products

● 44 per cent worry people may make bad financial decisions and lose their money

It should therefore be of no surprise that Nutmeg is highlighting transparency, both around fees and performance, as a key differentiator:

“You should be able to see where your pension pot is invested and how it’s performing whenever you want,” Nick Hungerford, chief executive and founder of Nutmeg, has said.

This demand for transparency is only likely to increase as people become more engaged with their pensions due to the need to manage their retirement. Providers that can respond to this demand are likely to benefit disproportionately.

5. Launch a beta pensions provider

One of the problems many successful companies face is their ability and appetite to innovate. Innovation nearly always means doing things differently, and therefore often threatens the profitability of the existing business.

Innovation also requires a very different set of skills, processes and governance from the business-as-usual activities of business optimisation and profit maximisation.

While improving existing services is obviously essential, and of great value to existing customers, there is an opportunity for pension providers to make a bolder bet by launching a beta pension provider.

This would be a completely new business with the licence and resources to completely re-imagine pension products, unconstrained by the technology, processes or shareholder expectations of the parent business.

Such a move could be seen as a nuclear option. However, if launched in parallel to transformation of the core business, it might better be characterised as a defensive move against new competitors, allowing the parent company to test new markets, propositions and ways of working, without derailing the focus on optimising and growing the existing business.

Final thoughts

Renewed consumer interest and engagement in pensions and life-long wealth management solutions has so far led to little innovation from startups or pension providers.

While the pension industry presents some unique challenges for new market entrants, including the amount of initial capital required and lengthy payback periods, existing providers would be wise not to underestimate the potential for disruption.

Other industries have seen big businesses react too slowly to changes in consumer behaviour and the market and suffer the consequences. Pension providers should act now to avoid the same fate.

Mark Priestley is a lead strategist at Adaptive Lab

Key points

The 2014 Pension Act introduced the biggest changes to how people contribute to and manage their pension funds in over a century.

Self-employment is on the rise and job tenure looks likely to decrease further.‬

Renewed consumer interest and engagement in pensions and life-long wealth management solutions has so far led to little innovation