Could micro payments be the solution to the pensions crisis?


With auto-enrolment rates rising this April from 2 per cent to 3 per cent, and the government announcing their intention to provide a top up to savings in the form of tax relief, it’s optimistic to assume everything will all work out in the end because, in theory, it should.

However, despite the increase in auto-enrolment rates and employer contributions rising to 5 per cent, there remains a significant gulf between what people are putting into their pension pots and the amount they will actually need to retire comfortably. A pensions crisis grips the nation; Britain’s ageing population and the rising costs of long-term elderly care is fast-creating a funding shortfall for sufficient support and the confusing pension tax relief system certainly hasn’t helped in incentivising Britons to save for the future.

If that wasn’t bad enough, new analysis of official data on UK household incomes indicates the gap between men and women’s pension income is more than twice that of the gender pay gap at 40%. According to a paper from the Centre for Policy Studies, 2018 was the year that saving in Britain dropped to a record low with households investing just 4.9% of their income for the future.

Experts suggest the reason behind the pensions gap (the difference between the current rate at which we are saving and the amount we will need for the future) stems predominantly from the complex nature of the pensions system. This is supported by findings from a study of UK workers conducted by PwC in which six in ten (59%) respondents said their lack of understanding puts them off saving more.

Unfortunately, solving the pensions crisis isn’t a simple case of increasing auto-enrolment rates. If workers today are to retire comfortably, government and industry must find a way to inspire people to take a proactive approach to their pensions. Fortunately, the introduction of PSD2 and the momentum towards open banking offers promise in the form of cutting-edge financial technology.

With seamless data sharing made possible through smart APIs, there is huge potential for banks to facilitate the act of future-proofing our finances through intuitive apps that make money management as quick and easy. Through open banking, there exists a real opportunity to provide customers with a holistic view of their finances across all accounts. With this in mind, pensions have the potential to become less of a dusty piggy bank on a bookshelf that no one wants to think about, to just another component of our unique financial profile that we top up every day.

Having recently been accepted into the Open Banking Implementation Entity regulatory sandbox, Moneyhub has an exciting opportunity to test innovative financial tech products, services and features that could be transformational for the consumer payment experience. Being able to do this within the sandbox, allows us to deploy to customer quickly, without the usual compliance hurdles that can stand in the way. We truly feel that tech has the potential to solve a whole raft of consumer finance problems, not least helping with our current pensions funding crisis. As such, a key part of  what we will be trialling in the sandbox, is making managing finances easier with micro-payment using PISP (Payment Initiation Service Provider), with Starling Bank.

The idea is to create a system in which frictionless micro-payments are made to your pension pot with your consent, and integrated as part of your daily financial activity. Some of you may already be familiar with micropayments, but this is the first solution of its kind that automates micro-payments in real time to promote a proactive approach to saving.

Until now, any micro-payments a user intended to make would be tracked and compiled into one high transaction at the end of the month – a helpful feature, but it certainly doesn’t encourage better savings behaviour.  Through our work with Starling Bank on micro-payments, Moneyhub will up your spare change in real-time - whether that’s 80p that you saved on your daily food budget or the £4 you saved on bus travel last Wednesday.

On the surface, it may not seem like much. However, a few pounds every day really adds up for retirement. Soon, the spare change that was swept up begins to make for a sizeable pile. As the interest accumulates, what started as a few pennies in a jar can quietly become a comfortable retirement income. Even just £2.50 a day for a 30 year old can grow to be worth £85k in retirement – a figure which seems daunting and out of reach today, but is perfectly achievable through daily micro-payments.

What’s more, I’m sure you’ll agree that it’s better to skim off a little extra from your daily spending and have it automatically sent to your savings than see a large lump sum leave your account at the same time your bills and rent are due.  By taking advantage of the possibilities born from open banking, our goal is to encourage a shift in attitude. We want to help people to view forward-planning for their long-term finances not as an intimidating mountain to climb in the future but an achievable target that can be easily tackled through minimal daily contributions.

Already, our involvement with the sandbox has provided invaluable insight into consumer behaviour and revealed the positive impact that nudges can have on our saving and spending habits. We’ve found that it really doesn’t take much for people to start changing their financial behaviours – just a push in the right direction like a health tracking app encourages us to take more steps or drink more water.

Thanks to our integration of Starling Bank’s API into our payment gateway, users can already initiate a payment straight from one account to the other in real-time, whether it’s an ISA, a savings account or a pension pot. Our upcoming trial of micro-payments using PISP offers a new solution to tackling the pensions crisis. By embracing an open, API-led approach, banks can play a leading role in transforming the way people view their pensions.

Rather than a looming concern that becomes scarier the longer you put it off, planning for retirement can become a proactive measure that people find satisfying – and you would be surprised how much you could save. In the long-run, it’s the 20p spare you had on an idle Tuesday that could just make all the difference.