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Evidence to Policy

Helping to Mend Britain’s Broken Pensions and Benefits System

Professor Frank McGroarty
Professor Frank McGroarty

Dr Andrew Urquhart and I, from Southampton Business School, have been working with the pensions and benefits industry to help resolve well-documented problems in the sector. We recently discussed the problem of “interoperability” at  a specialist focus group, bringing together influential representatives of public and private sector organisations. It was held at Digital Catapult’s office in London on 16th May.

In 2012, the Royal Society of Arts published a report titled “Seeing Through British Pensions: How to Increase Cost Transparency in UK Pension Schemes” which estimated the annualised  average fee charged by UK pension providers to be “…. 1.7%, and had been rising over previous years, and that trading costs were 1.4%, making a total charge of 3.1%. This was for an equity fund but if such a charge was applied over the 25-year life of a pension fund, more than half the poten­tial pension benefit would disappear”. This report prompted the pensions minister to impose a cap of 0.75% on charges for new pension savings from April 2014. However, an Office of Fair Trading report of December 2014 showed that older pension products continued to experience much higher ongoing servicing charges.

There are two roots to the problem of ongoing high pension charges. The first is the lack of Transparency – i.e. the customers cannot see the costs and so do not seek to challenge them. The second is lack of Interoperability – i.e. different pension providers’ platforms cannot communicate with each other and so moving assets from one pension scheme to another is difficult and costly. These two factors stifle competition, so that prudent and responsible British pension savers face much lower pots of capital at retirement than they expect. Andrew Urquhart and I saw an opportunity to do impactful research, which could help find a solution to market inefficiencies.

Discussions with the industry suggested a potential research project on the Blockchain technology, which underlies Bitcoin, in which both of us have a keen interest. However, further discussions revealed that this idea was too radical. At present, UK pension product distribution is via siloes dominated by large insurance companies. The distribution process is highly intermediated and insufficiently automated, so administration costs and transfer costs are high. In essence, no common open standards exist to which pension platforms must adhere, which is why there is insufficient interoperability. Common standards would be the first steps towards increasing automation and lowering administration costs. The industry has known this for years but has done nothing about it. No platform provider wants to take a lead because that would consume time and would produce no competitive advantage. Moreover, competitors would be suspicious of a unilaterally introduced solution. Furthermore, it is arguable that pension providers are satisfied with the prevailing high-fee status quo. Correspondingly, various government stakeholders have historically stated that the industry has abundant capital and is not a worthy candidate for public resources.

Dr Urquhart and I concluded that greater engagement was necessary from all key stakeholders, but particularly from government, who need to form an alternative vision to the status quo and provide leadership on this issue. As industry outsiders, we believed that we could help mediate a solution. The Centre for Digital Finance organised an invitation-only specialist focus group of pensions and benefits industry stakeholders at the Digital Catapult’s offices in London on May 16th. The event was attended by senior representatives from Government, Parliament and industry, including DWP, BEIS, BSI, UKAS, APPG on Fintech, CMA, Digital Catapult, GDS, Cabinet Office, Pensions Regulator, PASA, TTF and SBC Systems(UK) Ltd.

A poll at the Centre for Digital Finance event’s close showed unanimous agreement that all had received a deeper understanding of Interoperability’s importance in the pensions and benefits industry. Additionally, participants concluded that a government-led steering group should be formed to drive forward the interoperability standards issue. Several attendees have already committed to serve on this steering group. This was the best conceivable outcome from this event. We expect this steering group to succeed with this issue and in the near future. This should provide the setting for the Blockchain project we originally proposed.


Professor Frank McGroarty

Frank is Professor of Computational Finance and Investment Analytics within Southampton Business School at the University of Southampton.

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