In June, Plum announced it was expanding into retirement savings with the launch of a self-invested personal pension, two months after PensionBee floated on the London Stock Exchange.
Both providers, and others such as Moneybox and Penfold, to name a few, enable savers to consolidate pension pots.
Steve Webb, a partner at consultancy LCP, says: “There is no doubt that there is a big opportunity here. In addition to the historic defined contribution pots which people have accumulated, automatic enrolment means that another 10m people are now saving into a workplace pension, and this is overwhelmingly into a DC pot.
“Coupled with job moves and the lack of government action on small ‘stranded’ pots means more and more people will start to accrue multiple pots and their instinct will be to consolidate.”
But, as NextWealth’s managing director Heather Hopkins observes, building a consumer business in a highly regulated environment is expensive.
Indeed, according to PensionBee’s prospectus, published before its admission to trade on the London Stock Exchange, the provider has incurred net losses since inception.
In 2019 and 2020 PensionBee reported operating losses of £7m and £13m respectively, resulting from the provider’s investments in, and expenditures relating to, expanding its customer base and developing its technology platform.
The circumstances are reminiscent of online investment manager Nutmeg, which in April said the business was moving “closer to profitability” before JPMorgan Chase announced in June that it had agreed to acquire the digital wealth manager.
As Webb notes: “Set-up costs have to be incurred in full before revenue starts to come on stream. This is why new entrants expect to lose money in the early years.
“As assets under management or administration rise, so charge revenue will rise. But that is a gradual process, whereas fixed set-up costs of IT etc have to be incurred on day one.”
Dashboards: an opportunity or threat to online providers?
The approach of online providers in enabling savers to consolidate pots is similar to the anticipated pensions dashboards. According to the programme’s principal Chris Curry, dashboards will “enable individuals to access their pensions information online, securely and all in one place”.
Indeed, PensionBee notes in its prospectus that “dashboards, once established, will help consumers find their lost pensions and PensionBee expects digital services such as its own to thrive in an environment of increased transparency”.
Webb likewise says the dashboard presents an opportunity, as people will be reunited with lost pots and prompted to think about their scattered ones.
And despite high set-up costs, NextWealth’s Hopkins remarks that “for those that get it right, the payoff will be huge. Consumers don't tend to change pension providers often, so the business is sticky”.
This tendency not to switch is unlikely to come as a surprise, amid a general lack of engagement among savers.
A third (32 per cent) of adults contributing to a DC pension did not know, broadly speaking, how much their pension pot was worth, according to the Financial Conduct Authority’s Financial Lives 2020 survey. More than half (54 per cent) had not reviewed how much their pot was worth in the past 12 months.
But Holly Mackay, chief executive of financial website Boring Money, predicts greater engagement will emerge. “As auto-enrolment matures and as more young people start to accumulate meaningful balances, at some point the penny will drop that pensions are not just for rich people,” she says.
“Although I think it will be a slow burn, at some point the combination of higher balances, awareness of choice, better digital options and interest in impact investing will take us to a tipping point. People will come to see pensions as something they control rather than something which is ‘done to them’.”
However, LCP’s Webb says the dashboard also presents a threat to online pension providers as many may want to host one. “If, for example, your bank hosts a dashboard it may nudge you to move your pensions to the bank’s products,” he says.
Independent retirement and pensions consultant Richard Parkin agrees dashboards will hopefully make people more aware of their pension savings, and so could encourage consolidation.
But like Webb, Parkin also predicts existing pension providers will use dashboards to encourage consolidation into their own products, potentially making it even harder for standalone providers to drive switching.
“Also, many consumers will not want to have all of their eggs in one basket and dashboards may allow them to manage their pension savings without having to consolidate,” Parkin adds.
Hopkins likewise says the dashboard could be a threat to pension consolidators, but that it presents a greater threat to businesses that “rely on making it difficult to move pensions”.
As Sam Turner, a consultant at Altus, explains: “Where online pension consolidation is concerned, the consumer journey appears highly digital.
“However, the reality is that ceding pension providers are under no obligation to accept digital letters of authority, in some cases responding to requests for information with a request for a signed paper letter, which flies in the face of the digital experience PensionBee is trying to promote.”
The rise of the online pensions adviser
As digitalisation occurs on the provider side, advisers are also joining the technological revolution, with the launch of virtual retirement income planning service Chancery Lane this month, and automated advice service Destination Retirement in March.
Hub Group’s chief executive David Cooper says the latter was created to reach customers who otherwise would not seek professional help. According to the FCA, its retirement income data suggest more than a third (36 per cent) of pots accessed for the first time in 2019-20 used regulated financial advice.
After alternatives to meeting face-to-face became more common during lockdown, could such virtual and automated services be a solution to tackling the pension advice gap?
Rob Yuille, head of long-term savings policy at the Association of British Insurers, says there is “definitely” a role for automated advice to help fill the gap.
“It can reach more people at lower cost and provide flexibility for savers to access help whether at home or in the workplace,” Yuille adds.
Meanwhile, Royal London’s director of policy and external affairs, Jamie Jenkins, says that while the pandemic has led to greater use of online services, including how people deal with advisers, many still value human interaction at some stage of the process.
“As such, we are likely to see hybrid advice models become more prominent. In practice, technology will likely be used by advisers to complete much of the data gathering and fact find, deferring then to a face-to-face meeting in person or online,” says Jenkins.
Indeed, David Stevens, retirement director at LV, points to the provider’s own research indicating that face-to-face retirement advice remains the preferred option.
But Age UK charity director Caroline Abrahams says that regardless of how advice is delivered, “it’s clear that most savers are unlikely to be willing or able to pay for it”.
She adds: “Pension Wise will be crucial to boosting efforts to engage people in pensions decision making, and it’s imperative that take up is significantly increased by the creation of an automatic appointment booking system. It’s certainly possible that some people will then go on to take up an offer of paid-for advice.”
Chloe Cheung is a features writer at FTAdviser
