Can pension funds provide more personalised solutions?

At the same time, members themselves are growing more aware of the need to understand how and where their money is invested. They want to know if they are going to meet their goals.

These issues are not just taking hold in South Africa either. They are prevalent all over the world, and there is a great opportunity for the local industry to learn from what is happening elsewhere.

“A lot of funds have relied for many years on people being quite disengaged with their retirement savings,” explains Wade Matterson, Principal and Practice Leader at Milliman Australia. “Because it tended to be such a distant thing, large funds have really had an advantage because a large part of their member base really hasn’t paid attention.”

That, however, is changing. The generation currently entering retirement is demanding more.

“This group is switching on and saying what does this actually mean for my retirement, what is the investment strategy being used, and how do I engage,” Matterson says. “The challenge, however, is that a lot of funds don’t have the resources to give the financial advice that’s needed.”

Turning to technology

In essence, fund members are becoming more aware of the need to understand whether their retirement savings match their own, individual requirements. They realise that it is not enough to simply put away money every month and think that everything is taken care of.

The challenge for the industry, however, is that if a member feels that his or her savings are not going to be adequate, they currently have limited ability to do much about it in many pooled funds. That is what is driving the demand for more personalisation.

Traditionally, providing individualised solutions has not been something most funds could deliver. However, that is changing thanks to technological innovation.

“Technology is going to play a major role and funds are either going to embrace it or they are going to keep their heads in the sand,” Matterson says. “And from all the evidence we’re seeing, the early adopters are already making their move and embracing what technology can do.”

Pension funds that are switched on to what their members want and the ability for technology to facilitate it are already finding ways to deliver more tailored strategies, more personalised engagement, and relevant education. And they are doing it in a cost effective way.

This is of critical importance for trustees, because the issues they have to deal with are growing rapidly. It is no longer just a question of looking after the fund’s performance in a general sense, but also how a fund educates and interacts with its members so that they are more fully engaged.

Technology provides the means to do that, but it does require the knowledge and experience to make it work. This is why the composition of trustee boards will become ever more important, as funds will have to think about appointing independent trustees with the requisite expertise.

“You are going to see funds that are at the forefront, and others that are reluctant to move that way, and they will simply have a poorer service because they won’t be able to deal with complicated issues they need to address,” Matterson says.

What about defaults?

In South Africa, there has been a lot of talk in the industry recently about the need for default strategies – making the decisions for pension fund members as simple as possible. It may sound ironic, but it is the funds that manage to personalise these default strategies most efficiently that will stand out in future.

“If default strategies are not personalised there comes a point where you will be delivering the same strategy to people who are at entirely different life stages with different goals and different means,” says Matterson. “So how do you start to tailor these things? Only using the age of the member is over-simplistic, so funds are recognising that age is just one variable but you also have to look at the size of the pot already accumulated, the income the member has to replace, whether they are male or female, in a relationship or single.”

Technology actually makes this very feasible, as long as the member is willing to engage with the fund to provide this information and update it over time. If the interface is put in place, members should be able to enter their information and have the fund respond by automatically adjusting the default when and where it is needed.

For others, however, a default is not enough and they want to know that they have control over their own money. In Australia, pension fund legislation allows for self-managed funds where members have so much freedom that they are even able to actively trade with their retirement savings.

That is the extreme perhaps, but funds need to consider how much personalisation they can allow their members. If someone feels that they can manage their money better themselves, to what extent should they be allowed to do so?

Again, funds will have to consider how technology can provide the means to give members more individual choice. This will have to be within limits, as the costs have to be considered, but it may become a key selling point.

“It does becomes complicated because you are trying to deliver a personal outcome for somebody in a way that is elegant and cost-effective,” says Matterson. “It’s prohibitively expensive to deliver a finely tuned, tailored outcome to every single person, so you have to have to balance something you can do at scale that is structured to the individual. But that is how funds are going to differentiate themselves.”

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