When reading about the state of retirement savings in Europe, one often encounters the journalistic trope of a 'time bomb'. There's some substance behind the hyperbole. Europeans are materially underprepared for retirement, in a convergence of demographic, social, and macroeconomic forces which policymakers can't resolve alone. Will startups be able to defuse the bomb?
At Mosaic we're excited about the transformation of the wealth management industry at large. In this post, we'll focus on pensions specifically. Today, only 27% of Europeans aged between 25 and 59 have enrolled themselves in a pension product, and the continent's retirement savings gap has been estimated by Deloitte and Aviva at >$2T. In spite of the tax benefits offered by pension products, consumers' levels of engagement and education are low. While regulators increasingly focus on fee transparency and product suitability, fees often remain high, and are rarely structured in full alignment with the customer's interests.
Despite these limitations, pensions are a vast store of wealth. The total assets under management (AuM) of European pension funds are ~$9T (IPE, OECD) - and in the UK, the FT reports that pensions have overtaken property as the largest component of household wealth.
Today, the majority of this wealth sits in defined-benefit occupational schemes. However, a number of factors are coalescing to shift the balance of pension wealth - and potentially create opportunities for new entrants.
On the supply side, these factors include: a mix shift in pension types (from defined benefit to defined contribution); a mix shift in asset classes; and the emergence of digital investment platforms offering retail investors an informative, transparent and low-friction experience. On the demand side, these factors include: increased government initiatives to save for retirement; changes in the nature of work (with the rise of the gig economy, and more frequent job changes); and a backdrop of ageing populations and low interest rates.
So we're looking at a large category, with substantial inefficiency in the current state, and a number of factors which seem set to alter the structure of the market. What opportunities does this imply for startups?
Looking at startups that specifically target the pensions space, we're yet to see major success stories in Europe - but there are some nascent grounds for optimism. These include:
- the growth of US retirement startups such as Blooom ($4B AUM) and ForUsAll ($1B AUM);
- early European signals including the strategic acquisitions of Vaamo and Fairr, and an exciting crop of pensions startups such as PensionBee, Penfold, and Vantik.
To date, the most successful entrants in Europe have been robo-advisors which have started with more frequently traded investment products, and then expanded over time to offer personal pensions as they earn consumers' trust. We've seen this playbook from Nutmeg, Wealthsimple, MoneyFarm, and (imminently) Scalable Capital, each of which now exceeds $1B in total European AuM. Rather than competing with incumbent providers on fees, they instead aim to capture new mass-affluent investors via better education, new routes to market, and a better user experience.
Where might startups create new value for consumers?
We believe there's further opportunity for startups to close the retirement savings gap. Some ways to do so might include:
- Demystifying retirement savings. The problem of under-saving is partly a matter of inadequate financial education. We're excited to meet companies that tell a compelling story to consumers on why and how they should save for retirement, and take it to market effectively (likely via direct channels and a simple, frictionless onboarding journey). PensionBee is an exemplar of this model, and has amassed >250k customers since launching in 2014. In Germany, Afilio is building an education-centric product that helps consumers understand their needs at retirement.
- Flexible modes of interaction. For the growing self-employed segment, variable incomes mean it can be difficult to make stable recurring contributions from month to month. The ability to vary one's contributions flexibly from month to month may remove this barrier, offering better financial outcomes to an underserved market. To date, few providers appear to have adopted this model.
- Access to new asset classes. Equities and bonds (held increasingly in passively managed funds) are the leading asset classes held in pensions. Given the infrequency of transactions, pensions may be an appropriate wrapper for illiquid alternative asset classes (PE, property, real assets) - which may increase in popularity in an adverse stock market climate. There may also be an opportunity for pension products to capture consumer mindshare by emphasising ESG, as Matter has sought to do in Denmark and Abundance has in the UK.
- Consumer-friendly fee structures. Traditionally, platforms and fund managers both charge a flat percentage of AuM (some fund managers also charge a percentage upside for outperformance). Increased fee competition may lead to a rise in fulcrum fees (as are emerging in the US), where the fund manager shares in the downside of underperformance - thereby aligning their incentives to the customer. We're excited to see pension platforms that can encourage partner asset managers to adopt more consumer-friendly fee structures, and communicate this alignment of incentives to consumers.
- Fees alone are unlikely to be the mark of a new category leader, but we're excited to meet companies with a fresh approach to this antiquated model.
Routes to market
We've learned that there are trade-offs in terms of market entry and positioning. For instance, workplace pensions represent a far larger potential revenue pool than personal pensions, but the competition from incumbent pensions administrators is strong. Here are five possible routes to market, each with benefits and risks to consider:
- Offer personal pension products, via direct channels. This is hard to execute well, requiring high-quality consumer education at scale - and hence high CAC for potentially low AuM per customer. If done well, there's an opportunity to build significant asset bases through strong network effects (as we've seen challenger banks do).
- Offer personal pension products, via intermediaries (e.g. financial advisers). This approach tends to come with lower customer acquisition costs, and typically attracts higher-value customers - but can be difficult to scale. Unit economics may be more attractive than in the direct channel, although we should note the fee pressure that has resulted from MiFID II.
- Offer occupational pension products and services for SMEs and freelancers, to solve pain points that are specific to smaller businesses (such as onboarding / autoenrolment) - as Smarterly is doing in the UK, and Grandhood is in Denmark.
- Offer occupational pension products and services to corporates, to build a large captive audience of high-contribution end consumers. The prize is vast, but the barriers to entry may be high in a market dominated by incumbents, where switching propensity is likely to be low.
- Play further up the value chain, as an 'arms merchant' to incumbent pensions administrators and asset managers. This requires an information advantage, such as proprietary market or demographic data that helps with the management and distribution of pension funds.
Where do the challenges lie?
While there's opportunity in the pensions space, we also know that there have been few success stories relative to the size of the market. There are three major hurdles for startups to overcome in this space, and we're excited to meet entrepreneurs with elegant solutions to them:
- Unit economics. Pensions startups face a common quandary. Customer acquisition costs are high, contributions from the youngest / most digitally receptive consumers are low, and fees are an important competitive vector. This can be a recipe for long payback periods. The key question is: how do you carve out an effective distribution channel that grants unique access to high-value customers at scale and at low cost?
- Trust. Consumers may not readily entrust their retirement savings to new entrants that lack the perceived safety of an established brand.
- Incumbents. We are seeing increasing fee competition for personal pensions (Vanguard, for example, has just launched its new low-cost personal SIPP in the UK). It will be difficult for startups to compete on price without the economies of scale that vertically integrated incumbents enjoy.
With these pitfalls in mind, we recognise that the pensions market is a tough one for startups to crack. But the prize could be substantial, given the size of the market and the crucial role that retirement savings play for all of us.
If you're taking a revolutionary approach to pensions, or have a fresh take on the market, we'd love to chat. Please get in touch!