The pensions industry never stops talking about the need to increase engagement. There is nothing like seeking to scale the steepest mountain.
The majority of the almost 10 million people auto-enrolled since 2012 are in the fund chosen for them by their employer. A few will have actively chosen this default fund but most will not.
Many new auto-enrolment members are blithely unaware they are saving into a pension at all, never mind making an active investment choice.
We might say of the industry’s engagement campaigns that never has so much been said by so many to so little effect. And there we could safely leave it. Except for pension freedoms.
Since there is no longer a default retirement pathway, the absence of engagement looms large as an obstacle to a fit-for-purpose system. A choice has to be made.
The FCA has suggested contract-based providers offer customers three simplified “pathways” into income drawdown, as well as “forcing” them to make an active choice to park their retirement savings in cash accounts, while retaining the right in the future to impose a charge cap on the opaque charging structures it identifies in the retail market.
This is welcome, as far as it goes. But remember that cliff face. Turning an army of mostly disengaged savers into platoons of engaged investors is a steep mountain to climb.
In-depth research is a starting point. Understanding what savers really think about retirement and how they act cannot be done simply by asking a few polling questions.
It demands qualitative focus group conversations and the tracking of actions undertaken.
Most people want to feel ownership of their pension pots at retirement, which means offering them meaningful choices.
But they do not want to have to make complex retirement income choices, expecting providers to help them to do so. This brings me back to engagement and the distinction between ends and means.
We should not think of member engagement in the retirement phase as an end in itself but as a means to the end of better outcomes.
We know minimal engagement is often sensible for members; those who switch funds can end up paying higher fees and receiving lower returns. We know that more is often less in communications.
We know that human beings often have a poor understanding of their own decision-making, so what surveys and focus groups tell us about views must always be weighed up in light of the now vast behavioural science literature.
In the end, pension freedoms demand engagement at the point of retirement with a very complex decision about how to take income.
Investment pathways are a way to simplify that decision-making. But the devil in the detail is this: without regulated advice, how are individuals to have confidence in negotiating even a somewhat simplified version of what Nobel laureate Bill Sharpe calls “the nastiest, hardest problem in finance”.
Gregg McClymont is director, policy and external affairs, at B&CE