The dawn of innovation in pensions tech

by | Oct 31, 2020 | Pension Tech

To fix the roof while the sun is shining: it’s a nice idea but it’s not human nature. Far too often, a crisis is the catalyst for change and this is true in every field from politics and economics to pensions and benefits.

But if there’s one demographic that strives to escape this innate inertia it’s technologists. As a cohort, we crave innovation; we’re wired to think differently before the world demands it. And the value of doing so is more apparent now than ever in the pensions sector.

We have seen, in particular, that pension schemes require better data use and management. For far too long, those managing the schemes have based critical decisions on static data sets and quarterly meetings because they haven’t been able to get access to more live and detailed information.

From an investment perspective, the mark-to-market falls of the past two months have drastically exposed the inert nature of the information being relied upon. Clearly, in cases of extreme volatility, this approach isn’t just outdated; it’s downright dangerous for those responsible for member outcomes.

Advisors have been called upon for comfort and assurance, but how can they provide it using quarterly analysis? How can we eradicate irrational decisions if we don’t have the facts to inform our thinking?

Accessible Data

What we need in both these cases is a single and consistent data set accessible through tools that work remotely and reliably with real-time accuracy. Only then can decision-makers truly establish the strength of a scheme and the challenges it faces. Only then can they eliminate emotional responses from a crisis that requires calm, efficient and collaborative reasoning.

From a trustee perspective, we have witnessed those whom we’ve empowered with this data build the confidence to see where long-term plans are working as they should be and predict the impact of potential decisions before they need to make them – vitally mitigating against knee-jerk reactions. This has put them on the front foot and even looking for potential opportunities thrown up by volatility.

It is impressive progress in unprecedented times and only one example of the strides made possible by recent innovations in pensions technology.

But there is so much more that can be done if the industry continues to grasp and embrace new technology beyond the current crisis.

Those responsible for workplace pension schemes have too long contended with disparate sets of data and outdated systems. This poses a particular problem for multi-national firms who have a number of arrangements spanning several different regions.

In February, we worked with Ford to help address this problem by creating the first worldwide pensions data analytics tool via our ADA Fintech platform.

Like many multinationals, Ford is responsible for pensions arrangements of enormous scale and complexity: in this case, 120 schemes across 36 countries in defined benefit, defined contribution, and hybrid forms amounting to an annual cost of $1billion. And tracing all those dollars, or deploying them efficiently, was a huge challenge due to the quality of data they possessed and the lack of a clear framework for consistent global assessment.

Range Of Platforms

It is a problem that’s prominent in North America. Established companies with decades’ worth of M&A will have their data spread across a range of platforms and their workers allocated different benefits according to their age.

When those companies assess their spending or attempt to offer better outcomes, such divergence will prevent them from addressing the essential issues:

  • What exactly constitutes our ‘best’ pensions offering?
  • What returns can members expect from their respective scheme?
  • How do outcomes vary by location?
  • And how does this compare with spending by location?

To answer these questions, trustees and pension managers require something technically powerful yet practically intuitive – a single, centralized system for scoring and analysis that turns its millions of data points into a simple, side-by-side comparison of pension provisions around the globe.

In Ford’s case, we decided to assess several central factors – such as costs, charges, contribution rates, investment performance, and retirement outcomes – to provide their team with a clear, holistic view of their arrangements, plus vital information on aggregate value and potential room for improvement.

We also sought to empower the decision-makers financially. By streamlining an expansive HR process that has long been calling for standardization, we’ve enabled them to take control of their employee benefits and redeploy resources that have long been slipping into technical obscurity.

Only once investments have strategic intent do they look less like a tax and more like opportunity. And the tools exist to help trustees to realize that potential.

The Road As Yet Untravelled

At the same time, however, such advances only demonstrate that we, as a sector, still have so much ground to cover in the current phase of innovation.

For a start, the existing technology demands a much greater rate of industry adoption, both in and beyond the current crisis. In the case of ADA Fintech, it is already configured for objective comparisons of national pension schemes and norms; that suits a firm like Ford. But it could also offer smaller companies more local regional comparisons.

However large or small the scope, the fact remains that better data analysis has tangible advantages for any business. Better understanding how one’s own provisions fit within their regional context is crucial for improving staff retention and recruitment. Calculating value on a cost-per-member basis is grounds for negotiating rates with vendors. And simple, centralized access to a greater, more sophisticated pool of data is the key to introducing further savings and efficiencies.

Yet this is just the start – the embryonic stage – in the development of this technology. Take as an example the present importance of ‘straw people.’ The ability to calculate the pension outcomes for a virtual group of typical members is, right now, a fundamental feature and a feat of engineering.

Better Alternatives

But this will be replaced within the next five years by greater connection with the actual end-users: HR directors will be able to pinpoint the precise effect of existing arrangements on the real futures of real people. Meanwhile, machine learning (or AI) will urge them to uncover even better alternatives. Firms like Ford will have the freedom to play with virtual dollars and the confidence to probe at every imperfection.

To forecast these changes is not speculation – they’re as sure to emerge as the sun is to set. But it’s the dawn of innovation in pensions tech and we must be prepared to embrace its effects. Adoption is the driver of all evolution. And there’s no time like the present to try something new.

Originally featured on Benefits & Pensions Monitor: