Pension freedoms break providers outdated technology

The biggest challenge is providing the new level of flexibility demanded by customers and pension providers have told me this is a significant threat to their business.

In the past, these companies could rely on inertia to ensure a majority of scheme members would become annuity customers.

Now members can easily move to another provider if they do not like the service levels provided by the legacy company, or feel the firm does not provide the flexibility they require.

However, a growing number of firms see this as a major opportunity to steal a share of the at-retirement market from the traditional companies.

These companies’ more nimble and flexible systems give their customers full and rapid access to their funds.

This will cause a major shift in the industry over the coming years.

The winners will be those companies which have a sophisticated operational capability, rather than those offering a particular product or implementing a particular sales or marketing initiative.

Greater flexibility is required because of the plethora of options now available to retirees.

Pensioners can now choose to cash in their pension pot, invest in an income drawdown product, or purchase an annuity – or combine some or all of these options.

In addition, the legislation allows pensioners to access their pension pots as early as 55.

One of the major traditional providers stated recently that they have had to change over 100 products, 200 processes and 250 pieces of customer communication as a result of the pension reforms.

In the new world order, providers need administrative systems which have the flexibility to change operating processes quickly and easily, in response to legislative changes and product requirements.

For example, such systems will allow the members to make free cash withdrawals from their pension pot when they like, rather than be limited to a certain number of withdrawals a year – which often currently carries a cost to the member as well.

While the more fleet-of-foot wealth management companies are already updating systems, many larger pension providers have failed to grasp the nettle.

While the more fleet-of-foot wealth management companies are already updating systems, many larger pension providers have failed to grasp the nettle.

Instead, some are trying to use ad-hoc work-arounds to make a legacy system – which is designed to make occasional changes – into one which can cope with daily requests.

Part of the reluctance of insurance companies to grapple with the issue is due to the complexity of their existing IT systems.

Insurance is an industry that works best with significant scale. As a result, most of the UK’s largest pension providers have either merged or acquired companies and so are running multiple back-end systems.

Many firms think the only effective way to cope with the new flexibility is to rip out all of the legacy systems and replace them with one new system. This is an expensive undertaking and often goes wrong – and so they avoid taking this step.

But firms do not have to rebuild their IT systems from scratch in order to cope with the new flexibilities demanded by April’s changes.

There are specialist process management products which can be wrapped around legacy systems and provide this new functionality.

This means a consistent front end, integrated to the various legacy systems, which will deliver a much higher degree of accuracy than the work-arounds that firms are currently using, along with the ease and speed of change required to adapt to the regular modifications in products and legislation.

It is vital that larger providers resolve these issues in 2016 if they want to maintain their share of this market.

These firms will have to offer high service levels and be able to embrace further changes if they want to retain their customers, otherwise they risk losing market share, now that it is so easy to switch providers.

If they do not act now to introduce greater flexibility into their systems, they risk facing a long-term decline.

David Tryon is director of client management at DST Systems.