Business ecosystems are developing at remarkable speed, some enabled by changes in the ways we consume and produce, and others resulting from such transformation. Successful platforms like Google, Amazon, Spotify and Alibaba have built ecosystems that challenge existing industries. By enhancing product and service offerings and delivering outstanding customer experience they have disrupted traditional value chains.
In the European Life and Pensions industry however, disruptive business models are still notably absent. There is one local exception – or an early sign of disruption – in Norway, which we will return to.
As in other parts of the financial services industry, Life and Pensions providers are certainly looking to stay current, by emulating disruptors like the above global brands. A digitalized enterprise is essential for any sizeable business and responsive digital channels are increasingly important to connect and engage with customers.
There are numerous reasons for the lack of global challengers in the industry. Pensions are not just tangible assets that can be scaled globally at minimal incremental cost. Pension schemes are still today defined mainly on a national basis and carry a legacy from the early days of welfare society as we know it. Local income and pension tax implications further raise the bar for aspiring pan-European disruptors in the pensions space.
The EU and EIOPA (the European Insurance and Occupational Pensions Authority) are trying to harmonize pension regulations in this disparate European market with requirements for life insurers. Initiatives are made in the EU, as well as by national authorities, to improve understanding and sharing information about pensions, specifically covering pillars I and II.
In the Nordics, there are already citizen portals in place that aggregate information from multiple providers in pillars I and II, NorskPensjon.no, minpension.se, and PensionsInfo.dk.
At the beginning of 2021, we saw a disruptive change in a traditional pension market being met by a new platform business model initiative.
Norway – A disruptive pension hub for 1.5 million employees
Norway’s EPK (Egen pensjonskonto) reform, implemented in 2021, provides a single, personal account for all occupational pension savings, including from previous employments.
The reform also mandates that employees are updated on their occupational pensions and lets them choose pension provider individually, overriding any such choice made by employers, while the latter will still cover the administration fees.
For the incumbent pension providers and the new entrants, NOK 350 billion in premiums are at stake. Another NOK 40 billion in annual pension premiums will be paid by employers to the chosen pension providers. Six established life insurers saw a part of their market being challenged by the EPK legislation.
Industry leaders responded by creating a digital hub, Pensjonskontoregistret – the Pension Account Register (PAR). This was designed to facilitate the selection and transfer process for employees and eliminate friction for the pension providers.
The defined process also ensures that employees who want to switch pension providers are treated equally, regardless of their existing pension provider or their accumulated savings. One year into the reform, over 57,000 participants have actively chosen a pension provider and some NOK 50 billion in savings have been allocated to new pension providers.
The PAR platform business model logic
PAR, a non-profit entity jointly owned by life insurance companies, provides a digital platform for 1.5 million white-collar employees (consumers), enabling them to choose pension providers for their occupational pensions and connect the producers in the ecosystem value chain.
PAR adds more value by connecting consumers and producers, initiating and tracking the transfer of pension savings from the previously chosen pension provider to the new. By offering the infrastructure, producers can simplify the process, reduce cost and provide first-class customer communication regarding the transfer. The PAR platform also lets consumers more transparently compare prices and better manage financial risks in their savings portfolio.
Sweden – Service centers as platform business model for 5 million individuals
In Sweden, two platform business models were introduced in the early 2000s. These provide individual formation on savings and pensions digitally and issue annual statements. Platforms also manage enrollment of new employees into the pension plan, billing of employers and transfer paid premiums to the chosen pension providers. Together, they procure pension plans and serve 270,000 companies and close to five million employees and retirees.
The logic for a low-fee pension platform business model
The pensions managers Collectum and Fora provide digital platforms for the 80 percent of employees (consumers) in Sweden who are covered by collective labor agreements. The platforms enable individuals to choose pension providers/life insurers (producers) for their occupational pension. Collectum and Fora connect consumers and producers by providing low-cost pension plans through procurements of traditional insurance portfolios and unit-linked funds.
Pricing pressure from procurement has made management fees in Sweden among the lowest in Europe. Life insurance companies charge 0.09 – 0.17 percent on assets managed for a traditional insurance portfolio. Unit-linked policies are offered at 0.08 – 0.23 percent fees for the default funds.
- For the life insurance companies (producers), procurements give access to annual premiums of SEK 80 billion through highly automated integrations with Collectum and Fora. With low income from each policy, the game for the pension providers is to increase the volume of annual premiums and accumulated savings. High automation and cost-efficient administration are critical factors for competing in procurements.
Marketing offers another path to growth, targeting various customer segments ahead of procurements. The market for engaging sales agents, call centers or bank branches persuading potential customers to switch pension providers has grown over the past decade. A key target segment is policyholders nearing retirement with high accumulated savings.
- For Benefit Managers, platforms deliver value through an outsourced process for procurement and evaluation of investments opportunities for their employees and enrollment of new employees. The procured plans also cater to the possibility of entering partial retirement.
- For the insured (consumers), using a platform enables them to either select their pension provider or stay with the procured default provider. If or when an employee wants to change the pension provider, the annual premiums, and if selected, the accumulated savings Collectum and Fora automatically manage the transfer process. This also includes information regarding the transfer from both involved insurance companies.
The Confederation of Swedish Enterprise co-owns both Collectum and Fora, together with major labor organizations, their counterparts for negotiating procured pension plans.
Lumera – supporting pension platform business model providers in the Nordics
For over a decade, Lumera has provided cost-effective, fully automated access to multiple platform business model providers for our life insurance customers. Combining our industry and technology expertise, we build highly automated solutions for leveraging platform business models – reducing friction and creating value for consumers and producers.
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