This article was published first in FT Adviser.
While other industries have changed rapidly in response, until recently the retirement market was relatively immune. The Retail Distribution Review, which sought to improve distribution, failed to bring about the expected growth in direct and bank distribution and associated improvement in digital customer experience.
But that sense of immunity looks set to change. We recently found 57 per cent of retirement providers predict that dramatically different propositions will emerge in the near-future.
In a former life I launched an online-only enhanced annuity product in 2013. This provided first-hand experience into a retirement market that was still heavily dependent on the faxing of health questionnaires and telephone-based negotiation.
Since then, 'Freedom and Choice' has triggered a long-needed transformation in the world of pensions.
1) Innovate and deliver
Many observers may point to a lack of product innovation in the sector, and the sector itself may highlight the regulatory obstacles and distractions that have prevented this innovation.
But behind the scenes, the changes we're observing are transformational, from the way firms are using data to understand their customers, to the way they deliver change, to the technology that underpins their propositions.
New skills are in demand. Product actuaries are making way for data scientists. Prince II gurus are passing the baton to Agile Scrum Masters. And IT architects not familiar with service-orientated architecture will soon be unfamiliar with working life.
The FCA recently published interim findings from its Retirement outcomes review. It confirms, what individual retirement providers are experiencing – people raiding pension pots early is 'the new norm'. But this dynamic is likely to change dramatically over the coming decade as the number of 55-year-olds with substantial defined benefit pension pots decreases.
Research from Old Mutual Wealth, published in 2016, showed that while 50 per cent of retirees currently benefit from a defined benefit pension, the figure for over-50s not yet at retirement is only 34 per cent. The clock is ticking for government, advisers and pension providers to ensure the next generation get the retirement outcomes they're hoping for.
For some, it might be to make sure enough wealth is left for loved ones. For others, it might be ensuring funding for potential long term care needs. Or it might be the carefree option: a cruise, a car, a second life in the sun. Most likely it will be a combination of the three.
2) Differentiate and meet demand
In a Customer 1.0 world, businesses, whatever the sector, would focus on building products. This was epitomised by the early days of mass production, where thousands of Model T Fords were produced to the same specification, fulfilling a basic need with a new solution. In financial services terms, imagine a Lifetime Isa product, available under the product menu on your bank website.
In a Customer 2.0 world, brand plays a much bigger role. The key challenges for providers are demand generation and competition, differentiating products and services to grow demand and strengthen competitive position in maturing markets.
Customers buy products or services that fulfil a dream sold to them by brands and advertising. For financial services, perhaps there's now a brand associated with your Lifetime Isa product, making yours the 'nicer Lifetime Isa'.
In a Customer 3.0 world, providers seek to improve satisfaction. They focus on metrics like Net Promoter Score (NPS) to drive upsell, cross-sell and retention. Providers in this world recognise that a great product, and an attractive brand, isn't enough.
They invest in great experiences as well, often across multiple channels. In this world I can research my Lifetime Isa online, ask a few specific questions over the phone, before hopping back online to apply, then pay money in at a branch. In a Customer 3.0 world, I get a seamless experience throughout, so I feel like I'm dealing with one company.
Many providers, particularly in the retirement space, are striving to get to Customer 3.0. For example, only 7 per cent of providers we surveyed as part of our last retirement survey have fully optimised their use of data to support the customer experience. For pension providers today there are fundamental gaps in customer experience.
Those include significant delays in paying out cash, widespread errors in setting up products, or just gaps in the online provision of basic services.
3) Centre business models around the client
Pension providers are therefore some way off effectively addressing the demands of a customer 4.0 world, but there is a significant opportunity for differentiation should they embrace the challenge. Acknowledging the need to centre business models around the customer and helping them achieve their desired retirement outcomes will be a hallmark of successful retirement firms.
Successful direct-to-consumer providers will tag each customer according to the outcome, or combination of outcomes, they believe each customer is trying to achieve or style of retirement they aspire to. For example, each customer might sit somewhere on a triangle of desired outcomes, where the corners are 'fun-focused', 'care-focused' or 'legacy-focused'.
Knowing where each customer sits on this triangle means marketing departments can engage customers with the right messages. You avoid turning the fun-seekers off with doom and gloom messages about spiralling care costs. Your legacy-focused customers no longer see your campaigns as frivolous, and those worried about long-term care see you as a companion for the journey.
Meanwhile, your investment team and actuaries can provide that optimal blend of growth, income and guarantee to align financial outcomes to life outcomes. The means your customer is more likely to have enough money to pay for key life events, and less likely to run out of money altogether.
Your operational team can empathise with the customer goal by being alert to likely topics of conversation and prepared to provide an appropriate form of guidance. And your finance team can have a much better view of the lifetime value of each customer.
'Retirement reinvented': Adapting to the emerging retirement landscape
4) Consider the whole client journey
Understanding and focusing on customer outcomes is only the start. We're increasingly helping our clients to map their customers' entire universe to focus on things that influence the success and achievement of customers' retirement goals
Having a 'fun' retirement, for example, will take more than just money. Maybe your customer needs help finding and organising appropriate activities, so perhaps a retirement provider could suggest relevant travel and entertainment offers.
Maybe they need a circle of friends to enjoy them with, so the provider could promote local interest groups and other networks.
And maybe they'd like to share the fun they're having with friends and family, reinforcing relationships and further adding to an enjoyable retirement, so social media networks will play a part. A retirement provider should maintain an active social media presence, with relevant content woven into the same platforms that its customers have embraced.
Once they understand these elements, firms have the potential to define outcome-specific propositions, working out the role they need to play in their customers' universe.
Crucially, the mapped universe also highlights the other influences on customer behaviour, indicating possible collaborations and partnerships that may further build the lifetime value of the relationship.
Embedding this kind of outcome-based thinking is more than just a role for marketing and customer experience functions. It requires a culture and capability change across the organisation – from strategy, to risk and compliance, and right up to board level.
This will ensure that a firms' investment is focussed in the right areas and risk and compliance functions apply appropriate controls to protect customer interests without impacting the experience.
And it's also just the start. But firms that don't start thinking beyond customer experience now, risk losing out to their more Customer 4.0 focused competitors.
Mike Teall is a financial services expert at PA Consulting Group.