About this time last year, I wrote about the inclusion of pension transfers in the TeX initiative. Almost a year later, I was invited to talk at Tisa’s AGM about progress to date.
The pension industry stands at a crossroads. There has been a revolution in the private pensions market, and the workplace market is about to undergo the same experience. Platforms have revolutionised the saving and investment space bringing simplicity, administrative functionality and placing advisers and clients at the centre of the proposition.
Auto enrolment and pension freedom are going to radically change the pension market and the pension transfer processes that support that market will have change too. The volume of pension transfers is predicted to rise to something in the region of 2 million transfers per annum. Part of that market, in 'pot follows member', will be a new open-source model, based around multiple competing hubs.
These changes, and the ever growing realisation of the savings gap, particularly among the younger generation, mean that freedom of movement will be ever more important. A generation used to Internet shopping, online banking and mobile payments will not tolerate the hidebound, time-consuming processes of the current market.
The first scale player to offer instant online movement, perhaps between a mix of their own brands, will win big. No reason why, if you can switch a bank account in five days, this shouldn't be the aspiration for a pension. And it can be done, the times achieved by firms such as IFDS using integrated straight through processing solutions show what can be achieved now.
When more people play in that space the benefits will growth exponentially, as the target audience uses the new freedoms to move as well as save. But currently there's a gap between the expectation of clients and reality of what industry can deliver. The cash transfer world is handicapped by the settlement plus Bacs model. Will we see widespread adoption of the faster payments model? Perhaps, but the real prize is re-registration, taking out trading and dealing costs from transactions, and removing the 'out of market' exposure for clients.
In private pension world, for cash pension transfers, there is an established electronic solution in Origo Options:
“There are currently 60+ financial services brands using the Options Transfers Service for pension cash transfers. About 40,000 transfers go through the service each month and this volume is growing rapidly. Customers that have integrated Options with their administration systems are seeing further reductions in transfer times and costs.” Michael Roe, Origo.
But this has not cracked the whole market and is still built around the needs and model of the traditional life company businesses. Nothing wrong with that, they created it and it does the job well. But it means that other elements of the market are looking to other solutions.
That competition, effectively now between Options and the TeX open source Iso messaging, is a healthy challenge and a step towards a truly competitive market place. But the industry has to make some big decisions in the next few months and years. Essentially it comes down to, in the words of Ben Cocks of Altus, one of the challenger firms in the marketplace:
“…what do pension providers want this market to look like: Origo monopoly or open market? In the Stocks & Shares Isa market, Altus competes with Origo and Calastone and that broadly works to the benefit of the industry and the consumer. But for pension transfers the competition is between a TeX open market and an Origo proprietary system. DWP have announced open standards for Pot Follows Member so that can’t be the Origo proprietary system, but if TeX doesn’t make some headway then it might not be TeX either!”
TeX has come a long way, and for the past year the processes have been embedding in Isa and general account world. But a renewed focus on pensions is required, or the prize will start to slip out of our grasp.
And let’s be clear, progress in pensions has been sufficiently glacial that the industry risks the FCA concluding it is not moving fast enough, and mandating a solution. If we are not to have a solution forced on us from outside, as in the 'pot follows member' world, then the industry collectively has to tackle and resolve the issues now.
These issues have to be addressed:
• Lack of pension participation in the electronic transfers world (apart from the Origo cash transfer bubble).
• The danger of a move away from an open source solution to a proprietary polarised world.
• Reduction in the continued reliance on manual processes (and I know that most of us in the industry know we could be better at this).
• Lack of credible data on how the TeX world is progressing (or indeed the transfer world as a whole.
With 2 million transfers a year, and with unit costs driven downwards by the pot follows member solutions, the market to serve the remainder of the industry will, I believe, become even more competitive. That being the case, I believe the open source model gives the best chance of future cooperation and innovation. I say this as a representative of a firm which uses and supports the options system. But I want us to be in a position to pick and choose between genuine alternatives.
I think Origo are well placed to thrive in this new market, both for 'pot follows member' but also in open source transfers. And I think the challenger firms, be it Altus, Calastone, Actuare or whoever (and apologies to those I haven't named) will drive this market to be truly healthy and competitive.
I firmly believe that the market is both big enough and mature enough to support multiple vendors. My best guess is that, over time, the open source model will come to serve the needs of the pension industry best. It offers the best chance of integration with the 'pot follows member' world, and thus the vast array of new pension savers being created under auto enrolment. As an industry we have a wonderful opportunity to help grow this market and help close the savings gap. If we can do so, then we all win long term, both in business and as a society.
Pensions technical manager
Based on a speech given at the TISA AGM, 15 October 2014