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Gregg McClymont: The pension dashboard’s fatal flaw

McClymont-Gregg-Aberdeen-2017-CUTOUTIs industry right to think dashboard will boost engagement when inertia has proved such a dominant behaviour?

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.

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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

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Well maybe I’m a one-off, but I’ve built my own dashboard to run my pension with, and it very much encourages me to give it proper attention. It works too.

    I really do support an initiative that tells people financially where things are going.

  2. Christopher Pitt 15th June 2018 at 7:30 am

    Good article Gregg. You’re, of course, right to highlight the fact that most people are consumed by other, more immediate, priorities to devote their attention to longer-term savings. But, I guess my question for you is, how else do we address the issue of consumer engagement? Or, perhaps there should be an equivalent to auto-enrolment that operates in the decumulation arena, i.e. a default solution into which the vats majority of consumers would drop into through failure to do anything different. However, this approach would effectively remove the vast majority of people from any involvement (responsibility) for making any decisions about their pensions – which would, in turn, place all responsibility for delivering meaningful pensions back onto the state. Personally, I’m not sure that this is a fundamentally better position for the country to be in.

  3. We have created a consumer society to keep the economies going. So is it surprising that when people wake up they think I need to book an holiday rather than I need to save for retirement.

    As usual the government acts like a magpie when it sees a new shiny IT project that £millions can be wasted on just so they can say ‘well we tried’ even if they were told it was going to fail and it does fail.

  4. Gregg, your account of Thaler’s paper on the Swedish experience is factually correct, but both you and he raise the bar extremely high on what you mean by “engagement.” What you’re referring to is the fact that when the scheme began in 2000, backed by a big advertising campaign, about two-thirds of members made their own fund selections, but in the years since (with no advertising campaigns), very few of them have made any fund switches or undertaken any rebalancing. But for non-expert consumers, fund switches and rebalancings are entirely unfamiliar concepts that aren’t in any way obviously necessary, and to describe the failure to do so as “lack of engagement” is pretty harsh. The fact is that for Swedish pension savers who chose the DIY route, the level of expertise and confidence necessary to make ongoing decisions has always been set unrealistically high: to me (and actually also to Thaler, if you read his conclusions), it’s no surprise at all that after making their initial decisions, the very large majority lapsed back into inertia.

    • Greg’s point appears to put all pension savers in tbe same bucket. That’s not the case.

      Engagement is a journey not a destination.
      And as Lucian and others point out, different people will be different places: some won’t have started planning their journey; others will be well travelled.

      Does the’pensions industry’ do enough to engage people? Do employers, who are now having to contribute, take that extra step to help these new pension savers engage with their pension rather than simply pass that on to the provider? I think not.

      the dashboard is by no means a solution – but it might just set those who have yet to take that first step on the right path.

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