Shaping the future of defined contribution pensions: A strategic imperative
The UK’s Defined Contribution (DC) pension sector stands at a critical inflection point. Amidst regulatory reforms, technological advancements, and shifting consumer expectations, industry leaders must take decisive action to address the systemic challenge of pension adequacy.
Recent research underscores the urgency of the challenge, with more than 50% of UK savers projected to fall short of their retirement income targets set by the 2005 Pensions Commission.1 Meanwhile, 73% of employers with DC pension schemes lack confidence that their employees will retire with sufficient financial resources.2
We believe the DC pension market needs to take decisive action to address pension adequacy by embracing strategic innovation, harnessing the power of technology, and reimagining member engagement.
1 PLSA Five steps to better pensions: time for a new consensus, 2022
2 WTW DC Pensions and Savings Survey 2024
Technology is catalysing transformation in the industry
Pension providers must address customer needs for higher-net investment returns. We expect to see a drive for lower costs and charges through the consolidation of pension schemes into master trusts and contract-based pension. In fact, the UK pension industry is moving towards greater consolidation in an effort to improve investment outcomes and operational efficiency, reinforced by the Government’s Mansion House reforms.
By consolidating, providers will likely reduce costs, achieve more attractive fee structures due to their larger assets under management (AUM), and, especially for smaller employers, improve the range and quality of services offered to members. This should also help schemes better evidence value for money under the new value for money (VFM) framework proposed by the FCA. Large pension providers will need to respond by building resilient operational models adaptive to significant scale increases and retaining high service levels.
To increase capacity without significant overhead increases, providers will need to invest in appropriate generative and predictive artificial intelligence (AI) to automate processes. This will enhance investment strategies, streamline operations, and personalise customer interactions.
Additionally, alternative investments are emerging as a key strategy for boosting returns. The Mansion House reforms encourage DC funds to allocate at least 5% of assets to unlisted equities, signalling a shift towards diversified investment portfolios. To fully capitalise on this opportunity, alternative asset managers must accelerate digital transformation and align with pension providers’ evolving technological capabilities.
Collective DC (CDC) schemes also present a potential avenue for innovation. However, uncertainty persists regarding their multi-employer applicability. Industry leaders must provide clarity and drive confidence in alternative pension models.
Technology demands a fresh approach to customer engagement
Changing consumer expectations demand a new approach to pension engagement—and providers will have to find new ways to effectively engage members without increasing customer-facing staff.
Looking at the banking sector, where 88% of UK adults actively engage with online services, it’s clear that consumer preference has moved towards digital channels and pension providers have the opportunity to create intuitive, accessible pension platforms.10
For example, pension providers could leverage educational and hyper-personalised mobile apps and online platforms, with increased use of behavioural science techniques including gamification and habit-forming processes, nudges, mental accounting, and financial wellness assessments to encourage proactive retirement planning.
Similarly, they could deploy robo-advisors and generative AI to democratise financial guidance and make professional insights more accessible—at scale. But while digital adoption is high, an omnichannel approach is essential in meeting diverse consumer needs—especially for vulnerable individuals. Generative AI can also enhance human customer service by providing real-time, context-aware support and relevant information.
We’re also seeing an increased demand for financial transparency. With over 5.5 million UK users consolidating financial data, Open Banking’s relative success has opened the door for open finance within pensions.11 In an age of increased “job-hopping”, the Pensions Dashboard Programme has been an important first step for consumers to see all their pensions savings in on one place, enabling consumers to make holistic and informed decisions.
10 FCA Financial Lives Report 2022
11 FCA Financial Lives Report 2022
It all starts with data
For these initiatives to be impactful, information and advice needs to be relevant, personalised, and accurate—and this is reliant on significant amounts of high-quality data. Historically, however, pension scheme data has been poor and legacy systems inflexible. Compounding this, security and trust remain key adoption barriers for initiatives such as Open Banking, with 80% of consumers citing fraud and data protection concerns.12
If pension providers are to deliver high-quality services, they need to overcome legacy system constraints. Providers need to significantly invest in their data architecture to enable seamless integration, intelligent analytics, and enhanced security frameworks. In our view, investing in technology is critical to remaining relevant and competitive.
12 FCA Financial Lives Report 2022