• Could Jeff Bezos' Amazon solve the pensions conundrum?

Jeff Bezos has plenty of reasons to smile. Amazon, the company he started in 1994, today, has a market capitalisation of $559bn. If Amazon was a country it would be 23rd largest country in the world ranking just below Switzerland.

Not that it is even a glint in the corner of his eye but Jeff's retirement plan couldn't be in better shape; Jeff's 16% shareholding in Amazon Inc is valued at $91bn. And if Mr Bezos was his own sovereign nation, he would rank as the 66th largest country - somewhere between the Ukraine and the Slovak Republic and larger than Sri Lanka.

But could Mr Bezos, having secured his own retirement, help secure the retirement of millions of his users. And even if his cause was less noble, could Amazon catapult its market capitalisation to the next level by bringing about an ‘Uber’ style revolution in the world of pensions.

How could this happen?

In today’s saving environment, retirees now find that their retirement income levels depend mostly on their own discipline to save during their working lives.

Millions of today's savers are face an uncertain financial future in retirement due to a once-in-a-generation shift in investment risk from companies to employees. The closure of defined benefit pension funds and the transition to defined contribution (DC) arrangements means that, in the future, retirees from a DC arrangement can no longer rely on access to a retirement income that bears a high degree of resemblance to their working income just prior to retiring or to an income that is inflation-protected. Rather, the shift to DC means that the adage ‘what you put in is what you get out’ has never been more apt when it comes to pensions.

But, as the pictures show, too many people are simply not saving enough.

We may choose to blame a change in the values of millennials versus baby-boomers or a cultural acceptance of instant gratification. Either way, too many people are simply not saving enough to ensure a comfortable retirement.

And, to compound matters, saving for retirement, when it does happen, tends to start later in life.

Most of us only sober up to the need for a retirement plan when we start a family or hit mid-life. The power of compound interest, whilst still effective at this later age, would have been even more effective if our saving habit kicked in a bit earlier. To make matters worse, marriages are occurring much later (if at all) and children, often a catalyst for future planning, are being had later in life.

In summary, how do we get the world saving more, and from an earlier age, to provide for their retirement?The answer may lie in a simple, yet powerful observation, that saving and spending are two sides of the same coin.

Human nature would appear to pre-dispose us to spending on items that meet our immediate needs, often at the expense of saving for a longer-term goal. What if we could tap into this natural propensity to spend and turn it into a savings plan; a savings plan on auto-pilot.

What if, for each pound spent, a little bit of that pound could be automatically squirreled away?

So how could one of the most recognisable sales platforms, Amazon, be turned into the world’s most powerful savings platform?

In two simple steps.

1.   By allowing users to establish an Amazon profile that automatically, at checkout, added, say, 10% to cost of the basket.

 2.   By automatically directing that ‘10%’ into a retirement savings account, either a default account administered by Amazon or a plan chosen by the user, for example, an existing 401(k) plan in the US or self-invested personal pension in the UK.

Simple, yet effective.

Of course, we could continue to develop on this theme and rethink the savings ecosystem around this simple, yet basic concept.

Other possibilities include:

1. At the customer’s election, Amazon could link up with the local tax collecting authority (e.g. the IRS or HMRC) so that, at the time of tax filing, the tax credit emanating from this pension contribution was identified and paid directly back into the “Amazon” retirement savings account rather than being refunded into a bank account.
2. In the event that other retailers offered their customers the same option to set up their online buying profiles in a similar way then, Amazon, having built the plumbing to facilitate and track savings, could allow other online retailers access to the default Amazon savings platform.

Back to Amazon and Mr Bezos. Revenue at Amazon last year was approximately $135bn, of which $90bn was attributable to retail sales. With a 20% take-up rate of this ‘auto-pilot’ retirement savings option, and a 10% 'contribution rate', Amazon could be helping their customers squirrel away $1.8bn every year. This amount could be multiples higher than this, in the event that customers began to view Amazon as their primary retirement savings vehicle. It isn’t hard to imagine Amazon building a retirement savings business, that in a short span of time, accumulated assets under management well in excess of $100bn. It would also make Amazon a Top 200 asset management firm, ranked by assets under management. Something that Amazon’s shareholders may well come to appreciate. 

For those of you thinking that this doesn't sound core to Amazon’s business of being an online retailer, it may be worthwhile pointing out that Amazon’s core profit making business is not its online retail business. Whilst the majority of Amazon’s revenuecomes from online sales, the online retail sales business is not the major driver of profits. Amazon’s profits come from a more obscure part of its business, its Amazon Web Services (AWS) – a part of the business that provides outsourced cloud computing services. For example, Netflix uses AWS for almost all its backend infrastructure, storing and streaming of its web series.

So, should Amazon wish to add a further revenue stream through providing financial services, and more importantly financial security, it could do worse than consider exploring the world of pension saving.

In summary, whilst this blog considers a specific example of how Amazon could enable their customers to save more for retirement, the more general point is to question our current paradigm of separating spending and saving ecosystems. The exception may be 'rewards' programmes (e.g. earning air miles for spending) but one could argue that even this does not go nearly far enough towards integrating the two ecosystems.

More specifically, by looking into innovative ways in which we can redesign how we link our savings ecosystem more directly with our spending ecosystem, we may stand a better of chance of introducing a disciplined and consistent approach to saving for retirement. One that begins with the very first pay cheque.