Driving Pensions Engagement Through a Whole of Life Financial Planning App

30 November 2023

Paul Muir discusses stochastic modelling and cloud computing to drive pensions engagement The impressive Scottish Widows Retirement Report 2023, together with its inaugural National Retirement Forecast (NRF), provided some unique insights associated with specific age groups as well as other ‘retirement vulnerable' groups such as the self-employed and those with a disability. However, the findings linked to young adults proved the most arresting for me.

Reducing Pension Contributions

For example, the study found that 17% of 22 to 29-year-olds had responded to the income pressures associated with the current cost of living crisis by reducing their pension contributions. Alarmingly, across all age brackets, an average of 13% had reduced their pension contributions in response to falls in disposable income as inflation climbed.

Interestingly, Dunstan Thomas' own 2020 study of Generation Xers (now aged 40 to 55) also uncovered evidence of this older group taking long pension contribution holidays during the Great Recession of 2008-2013. Our findings also suggested many of them never went back to regular pension contributions after unplugging.

Generation X Consumer Study

The Scottish Widows report also calculated that nearly half (41%) of people currently in their 20s are heading for ‘hardship in retirement', with an average retirement income of £10,000 anticipated amongst this age group. The Pension and Lifetime Savings Association's (PLSA) Retirement Living Standards ‘minimum' lifestyle calculations demand £12,800 of annual retirement income for a single person (and £19,900 for a couple) living outside London.

We also know from other studies that it is taking much longer for young people to climb onto the housing ladder. As we all know, equity release or downsizing are clear options to top up retirement income for homeowners today. However, home ownership data shows that the average age for first-time buyers in the UK has been rising fast - from age 30 in 2007 to 34 in the latest numbers gathered in 2021.

According to Scottish Widows, the number of people predicted to be renting into retirement will triple over the next 15 years and this will have a major impact on retirement income levels needed. In the south east of England rental price increases already gobble up nearly all (and in London 131%) of average retirement incomes.

So, arguably the most significant challenge for ensuring that those in their 20s today can retire at a reasonable age (perhaps close to their state pension age) is to get them paying enough into their pensions in a consistent way, rising as their income rises, and ideally running at 12% or more of their earnings, assuming they are at, or above, appropriate earnings thresholds for auto-enrolment entitlement. The reality is that many in their 20s are not in full-time single employer work today. Several have a suite of erratic earnings sources. Some run internet-based ‘side hustles' which generate irregular income. Others are part of the gig economy. These sorts of working patterns don't lend themselves to regular pension-based saving.

Pensions Engagement Apps

Scottish Widows, in the webinar that the provider staged to talk through its 2023 NRF study, highlighted that in order to engage young people in pensions saving today they need to go to the places that this age group is.

So, that might mean opening up dialogue via TikTok. However, it also means creating smart mobile apps so that they can explore what different pension savings regimes are likely to deliver in terms of a retirement income. It should be possible to use new digital tools to engage them in setting retirement income targets, adding in projected State Pension entitlements, and building resilience into their accumulation regime.

The same study uncovered the fact that across all age groups, 58% don't know how much they will get from the state pension and when they will receive that money. Yet significantly, more than half of UK people will be largely dependent on the state pension entitlement for the bulk of their retirement income, the Scottish Widows study confirmed.

Smart connectors into the DWP's portal to check your state pension entitlement can also be created. Young adults can be invited to put in other long-term investment details, select an age for prospective retirement and ask the app's underlying calculator to produce some retirement income scenarios. Static annual pension statements of today need to go live, interactive and become much more visual as soon as possible to work for the digitally connected generation.

Stochastic Modelling for Pensions

Stochastic Modelling Tool utilising cloud technology and a microservice architecture Stochastic modelling can be applied to help young people build resilience into their pensions savings regime and close saving shortfalls. The app could invite you to test the impact of different events on a selected portfolio profile.

Scenario 1 might be ‘a market crash lasting two years'. After all, market falls of one type or another are pretty common events if we look back to the shocks of 1992, 1997, 2000, and 2008-9 just in the last 30 years. Stochastics have enough historical data to work with now to provide some pretty realistic estimates for the sort of damage this sort of event could do to typical equities-heavy portfolios, for example.

Stochastics works by running thousands of scenarios, using an element of randomness to calculate results. This work is generally done in the cloud today for the added assurance of speed, availability and robustness. Stochastics can be used to explore life event scenarios like a disability limiting a household income and savings levels for a period, or the need to fund care arrangements during later retirement.

A further scenario may include living longer than current UK average mortality which currently sits at 81.8 years for UK resident men and 85.5 for women in 2020 or taking time off work to care for elderly parents.

Whole of Life Financial Planning Apps

Apps also offer providers the potential to front-end any app onboarding process by finding out more about each user's circumstances: exploring retirement expectations, any vulnerabilities or circumstances which might limit ability to work full-time, save regularly, and much more. Treating young app users as individuals and enabling them to build their own retirement plan on their smart phone is surely the way to engender deeper engagement.

Providers could be even more holistic in their thinking to seek customer engagement as early as possible by creating ‘a whole of life financial planning app' - supporting younger members regardless of where they are on life's journey.

My eldest daughter is eight, and whilst a bit too young for a financial planning app I have recently introduced her to NatWest's Rooster card and app, which allows her to earn money through chores, see her balance and pay for things on her own card, its been a revelation for both getting her to help around the house and for understanding how money works.

What would be great is that these apps evolve as users grow and through the power of open APIs and AI offer suggestions based on personalised data and where the individual is on life's journey.

There are many other big life events to plan and save for: saving a deposit for their first home, paying for a wedding, supporting time away from the workplace for one-half of the couple for parenting, building a top-up tuition fee fund for children, and much more. If the apps of the future can offer a place to plan all saving, then it is natural for customers to use that same app to explore pensions contribution adjustment during accumulation, retirement income planning and even laying inheritance plans down.

Alerts for Pensions Re-Engagement

In short, pensions engagement does not need to start or stop once regular contributions are being put into a pension pot. Alerts could be set up to bring users back into the app if their regular income has increased and they might want to explore how a corresponding increase in pension contribution could feed through to slightly earlier retirement or higher income in retirement.

Effectively gamifying this planning and making both accumulation and decumulation more dynamic, and dare I say interesting for younger people, cannot fail to improve pensions engagement amongst this permanently ‘connected' generation.

In retirement, it could also help enable people to keep their retirement income in line with remaining savings pots, nudging adjustments up or down based on investment performance or a range of other scenarios (some of which may have been planned for way back in the accumulation phase).

Of course, financial advice is the best way of planning for retirement and working out how much to draw down and/or annuitise. However, the real risk is that without greater access to regulated advice, and/or smart application of digital tools and modelling, the numbers living in poverty in retirement can only rise from more than one in three (35%) of Brits already heading for this predicament in retirement, according to Scottish Widows' 19th annual Retirement Report 2023.

Stochastic Modelling Tool Pension Drawdown Tools
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Paul Muir
Chief Product Officer at Dunstan Thomas