Tony Tarquini, Director of Insurance, EMEA, Pegasystems
The increase in the minimum employer contribution to auto-enrolled pensions from 1% to 2% in April 2018 represented an unmissable opportunity for the UK workforce to prepare for a comfortable retirement. However, the simultaneous rise in the minimum staff contribution from 1% to 3% has led to industry-wide concern that auto-enrolment opt-outs will grow, threatening the future of insurance companies.
Despite these concerns, there is no doubt whatsoever that technology can be used to educate, cross-sell, upsell, nudge, influence and encourage customers to understand the need to save, both for a rainy day and for their old age.
Millions of vulnerable consumers
Since auto-enrolment was introduced in 2012, nearly 10 million workers have been auto-enrolled in pensions according to figures from The Pensions Regulator. However, data released by the ONS as part of its Wealth and Assets Survey in August found auto-enrolment has not led to a noticeable change in attitudes towards saving.In the period July 2016 – December 2017, just 17% of 16 to 24s felt that they knew enough about pensions to make decisions about saving for retirement. When taking into account all non-retired respondents, less than half (42%) felt they knew enough.
Insurance group Zurich’s own research found some alarming statistics of its own. The company recently discovered 24% of adults have no savings to fall back on and that 17.6m people in the UK would struggle to recover from a financial shock or loss of income. This suggests that regulatory reform isn’t enough to alter consumer behaviour and highlights the need for inspiring change in other ways before it is too late.
I still get people asking me if auto-enrolment is a “good idea”. Nobody is talking about the upside benefits of employers’ contributions doubling from 1% to 2%. This is all free money and all the contributions are tax free. One way I have previously explained why auto-enrolment is a good idea is by asking the person to put £10 on the table and noting that I would then match it with £10 of my own money. I would then point out that they would receive 100% interest on day one and query how old they would have to grow to match that through normal interest. The answer is infinity at today’s rates! I would also point out that you only have to put up a maximum of £7.50 not £10, as it is pre-tax. It would take (literally) a lifetime to recoup the lost money if people opted out – doing so is like walking into the street and burning £10 notes. They then understand immediately.
Communication is key to behavioural change
I believe the key to behavioural change is effective marketing. Technology can be used to mass personalise every individuals’ pension product and show them how they can protect their lives and not live in penury in their old age. It just needs motivation, good customer engagement and the right tech!
Insurers should be using all forms of omni channel marketing technology to change behaviours. They can do this by providing business-friendly technology interfaces that help companies provide customer-centric, high-value engagements to improve every customer experience, enable more effective retention and achieve high response rates. This can include mobile apps, social media and artificial intelligence-based interactions to foster better engagement and buy-in.
For example, from August 2018, Aviva has been enabling customers to check how much money they have saved towards their pension by asking their Amazon Alexa, an easy way for the insurer to make the idea of saving for retirement much more engaging. Tech such as this can also help contextualise the importance of saving for a pension at every life stage, especially for those at the start of their careers with lots of short-term costs such as rent that they might prioritise over pensions.
AI can help identify the best time to talk
Artificial intelligence is a particularly useful technology in communicating the benefits of auto-enrolment as it can help insurers decide the best time to talk to their customers about pensions – at points of their lives consumers actually want to talk to their insurers. These points are known as “Life Events”. If a consumer is approaching a milestone, whether it be the placing of a deposit on a new home, engagement or new baby, they are far more likely to be ready to review their financial situation and be thinking about the future than they would if they were just thinking about the short-term. Expectant mothers and fathers may also be prompted to change their thinking about saving, as they realise that it is no longer just their futures that would be affected by financial shock but their children’s too.
The future of auto-enrolment
The minimum automatic enrolment contribution from employers is set to rise again on 6 April 2019 from 2% to 3%, but the minimum contribution from staff is due to rise from 3% to 5% on the same date. Insurers should take the opportunity to work with businesses now in an effort to prevent further auto-enrolment opt-outs.
Maya Angelou once famously said “people will forget what you said, people will forget what you did, but people will never forget how you made them feel”. The intelligent application of AI insurers can appeal to people at just the right moment to help guide them to good decisions around auto-enrolment and have the potential for quite significant success.
Technological innovation will be key not only to reducing the number of consumers opting out but also encouraging more to change the way they think about pensions and savings in general.
COVID-19 and PCL property – a market on the rise?
By Alpa Bhakta, CEO of Butterfield Mortgages Limited
Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.
Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.
Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.
However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.
Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.
However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.
Investors are flocking to PCL opportunities
The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.
Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.
Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.
So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.
Remote working and PCL
On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.
While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.
Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.
A busy few months
Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.
In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.
Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
Optimising tax reclaim through tech: What wealth managers need to know in trying times
By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange
This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.
The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.
Evolving tax reclaim
The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.
Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.
Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.
Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.
Simplifying tax through tech
While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.
By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.
It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.
End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.
As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets. Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.
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