Could fraud prevention in banking transform the pensions industry?

Over the past decade, banks have led the way in using technology like biometrics and AI to fight fraud. But other financial sectors, such as pensions, lag behind. What lessons can be learned from banking to making pensions more resilient?

For many years, the banking industry has been at the forefront of leveraging technology to combat fraud. Innovations like biometric authentication, AI-powered transaction monitoring, and real-time alerts have significantly reduced vulnerabilities, setting a high standard for fraud prevention. However, the pensions industry, managing trillions of dollars globally, has yet to fully embrace these advancements. In the UK, there were 559 reports of pension fraud in total and £17,750,635 lost in 2023, an average of £46,959 per person, according to The Pensions Regulator. Could adopting lessons from banking revolutionise fraud prevention in pensions?

Why pensions lag behind

Jo Whalley, Director at bigspark, highlights the unique challenges faced by the pensions sector. “The industry’s business model typically revolves around managing large volumes with relatively low per-member profit margins, especially in defined contribution schemes,” she says. “This focus on scale means that margins are often squeezed, making significant investment in automation and technology challenging.”

Adding to the issue, outdated systems and manual processes dominate the industry. “Legacy systems and heavily manual processes create vulnerabilities by relying on human intervention for tasks like identity verification and document checks,” Jo continues. “The sheer volume of members makes it easy for humans to miss subtle signs of identity theft or falsified documents.”

Ian Gutteridge, Non-Executive Director at bigspark and Fellow of the Personal Finance Society with over 30 years of experience in the pensions and financial advice industry, elaborates on the cost-sensitive nature of pensions administration. “Administering pension schemes has always been price-sensitive,” he says. “Profit margins are low, and the cost of introducing advanced fraud prevention technology is not easily met. It’s still a people-driven business, with administrators relying on fairly advanced CRM systems, but still requiring human intervention to spot fraud.”

The fraud risks in pensions

The risks facing pensions are strikingly similar to those banks have tackled over the past decade. Identity theft, falsified documentation, and rogue advisers are all key threats facing the industry.

“Modern scam techniques leverage personal information through social engineering, impersonation of legitimate providers, and falsified transfer documents,” says Jo. “Rogue advisers also promise unrealistic returns, often coaching members to answer due diligence questions while pushing them towards unregulated assets or portfolios with conflicts of interest.”

Ian says that the techniques employed by fraudsters should not be underestimated. “Methods have become increasingly sophisticated, using techniques like intercepting emails, mining social media, and accessing public records to steal identities,” he warns. “Essentially, the issues banks have faced over the last 10 years are now infiltrating the pensions sector. As banks get tougher, fraudsters will look elsewhere, and the pensions industry could become a bigger target.”

Lessons from banking

What can pensions learn from banks’ success? According to Jo, the key is adopting automation and skipping directly to AI-powered solutions. “This approach would streamline fraud prevention, cut costs, and improve accuracy,” she says. “Crucially, it would also allow human analysts to focus on strategic, higher-value activities, driving operational efficiency and resilience.”

The experience demonstrated by banks shows that investing in fraud prevention benefits both customers and providers. “Protecting customer accounts is a win for both parties,” says Ian. “If funds go missing, banks often have to cover the shortfall, which impacts their bottom line and reputation. The pensions sector could similarly benefit from safeguarding members’ savings.”

Harnessing AI in pensions

AI-powered tools like transaction monitoring and anomaly detection have transformed banking. Jo believes that similar technologies could revolutionise pensions. “AI-driven tools can automate repetitive tasks, improve fraud detection accuracy, and free up valuable resources,” she says. “For example, bigspark’s AI-driven KYC investigator, Kai, connects to any data source, enabling real-time monitoring. Its modular framework combines manual, semi-automated, and AI-driven tasks.”

The potential for AI doesn’t stop there. Jo highlights how generative AI and modular systems like Kai’s prompt engine could streamline fraud prevention, compliance, and identity verification in pensions. These tools eliminate the need for siloed solutions, enhancing scalability and efficiency.

Biometrics and blockchain: The next frontier

Emerging technologies like biometric authentication and blockchain offer further opportunities to secure pensions. “Biometrics, such as fingerprints or facial recognition, provide a quick and secure way for members to verify their identity, making it harder for fraudsters to access accounts,” says Jo. “Blockchain, on the other hand, creates tamper-proof records of transactions and data, ensuring transparency and trust.”

Combined, these tools could protect sensitive data, reduce fraud, and enhance the reliability of pensions systems. Blockchain’s ability to automate tasks like compliance checks and payouts could further streamline operations.

Challenges and opportunities

Despite the clear benefits, implementing advanced technologies in pensions is not without challenges. “The fragmented or incomplete member data in pensions reduces AI’s effectiveness,” says Jo. “Additionally, the long-term focus of pensions and the unique regulatory landscape make aligning AI solutions with compliance more complex.”

Collaboration between banks and pension providers could help overcome these hurdles, but data privacy regulations, such as GDPR, would need to be considered. “Technologies like blockchain could enable secure, decentralised sharing of verified data without exposing private details, helping both sectors identify and prevent fraud,” Ian suggests.

A path forward

Regulatory pressures have driven innovation in banking, and similar measures could incentivise change in pensions. “If regulators introduce stricter fraud prevention requirements and impose meaningful penalties for non-compliance, pension providers may be more motivated to invest in advanced technologies,” says Jo.

If pensions providers wish to adopt technology-based fraud prevention measures, then solutions that deliver both security and efficiency are the answer. “AI-driven tools can demonstrate clear value and ROI,” Jo continues. “At bigspark, we help organisations build compelling business cases for adopting innovative technologies tailored to their needs.” 

While the pensions industry faces significant challenges in adopting advanced fraud prevention technologies, the potential benefits – from enhanced security to improved efficiency – are undeniable. By acknowledging the known scale of fraud and learning from banking’s successes, the pensions industry can embrace innovations like AI, biometrics, and blockchain to protect members’ savings and build a more resilient future.

If you would like to discuss this article further or understand our KAI offering click here