The pensions dashboard concept has captured the imagination of the government and industry, and the attraction is obvious.
Digitalise all existing records so individuals can see their aggregated pension entitlements in once place at the click of a button, allow them to layer that on top of their other financial assets and liabilities using the latest technology and, boom, people can see their personal balance sheet in real time for the first time.
Suitably armed with the requisite information, individuals will begin to make long-term decisions on their financial health and wellbeing.
It is certainly a seductive tale. The lack of demand side in pensions and savings is a cardinal weakness that has been discussed by a variety of commissions, inquiries and investigations over the years.
Making pensions and long-term savings more like other markets, with consumers making purchasing decisions based on a combination of price and quality (value, in the usual parlance), is an understandable objective.
After all, this is how effective competition works. And digitalisation surely offers exciting ways of reducing the frictions people experience in consuming pensions products.
Put the pensions industry in a room to discuss what needs to be done to improve outcomes and soon everyone is talking about the necessity of greater consumer engagement and digital strategies.
This is understandable. But it is also odd.
The awarding of the Nobel Prize in Economics for 2017 to Richard Thaler confirmed the global impact of behavioural economics on market design.
The emphasis on psychological dispositions, which began with psychologists Kahneman and Tversky in the 1970s, is now firmly established as crucial to understanding how individuals behave as consumers.
These insights form the basis of one of the greater government success stories of the past two decades: auto-enrolment. The UK has 10 million more pension savers than it did five years ago because policy harnessed the inertia of individuals in the face of long-term saving decision making, which behavioural economics established the existence of beyond all doubt. The opt-out design of auto-enrolment is the means of harnessing that inertia.
One might argue individuals are more likely to engage with their long-term savings as their accumulated balance grows – and indeed there is some evidence that once an individual accrues the equivalent of a year’s salary in savings propensity to engage increases. But it does so from a very low base.
For example, despite the claims sometimes made for the Australian superannuation system, engagement remains low beyond a particular group of mostly over-50s with large balances (on average around AUS$500,000) who are their own chief investment officer via the self-managed super fund system.
Nor is the evidence from elsewhere globally overly encouraging. Sweden is considered one of the more financially literate populations in the world, possessing a pension system which is more cohesive and less fragmented than the UK’s. Yet the “orange envelope” which drops on the doormat of every Swedish citizen every year detailing their total pensions entitlements goes unopened by around half of them.
What is more, even from the half that will open it, actions flowing from that receipt of information are hard to find.
To go back to Thaler, his recent paper on the Swedish pension system found that driving individual engagement had only been possible when huge resources were devoted to the objective on a perpetual basis. As soon as the heavy spend stopped, individuals reverted to their “normal” state – inertia. There was no pay-off in terms of sustained levels of increased engagement.
In the context of this evidence, both empirical and theoretical, enthusiasm for a UK pensions dashboard seems disproportionate. That is, until one paints pension freedoms on our canvas. Because in a world where individuals must make their own decisions about turning their accumulated savings into a retirement income, the cardinal issue is whether individuals are equipped for this task.
Enthusiasm for the dashboard offers its own oblique answer to that question.
Gregg McClymont is head of retirement at Aberdeen Standard Investments