It’s been said that the definition of insanity is “doing the same thing over and over again and expecting different results”. It’s a phrase that came to mind when reading the government’s proposed amendment to the Financial Guidance and Claims bill.
Currently pension providers must signpost those wanting to access pension cash towards pension guidance (or advice) and “encourage” them to take it. Under the new proposal they would have to “recommend” they take it. That’s quite a subtle difference and definitely more of a tweak than a revolution.
The feeble wording is a surprise because the Government appeared to have accepted the urgent need to boost take-up of pension guidance and appeared to be formulating a stronger nudge.
Last Monday while debating the Financial Guidance and Claims bill, pension and financial inclusion minister Guy Opperman said: “We support the need for default guidance for people wishing to take advantage of pensions freedoms.” He went on to add: “…there is merit in providing for people to receive a further nudge, and that this is the right direction of travel.”
Unfortunately the direction of travel, after hours of Parliamentary time in both the Commons and Lords, seems to have brought us back to where we started.
Let’s remind ourselves of the basic problem. The nudge concept comes from behavioural economics and the recognition that people are not rational beings. We know over-eating, drinking alcohol and gambling are bad for us, but that doesn’t stop us. That extends to financial decisions too, where a host of behavioural biases leads to poor decision-making.
In this environment, giving people extra choices doesn’t help. Pension savers now have more freedom to access their money, but not necessarily more insight into their own lack of knowledge or greater understanding of how best to use those options. It is only within the right framework and with thoughtful nudges and incentives that we can help people make more rational decisions.
A guidance “default” should expect you to take part unless you make an active decision to opt out. The idea of defaults is to harness inertia and direct it towards a positive outcome while still allowing complete freedom of choice. As with auto-enrolment into pensions, the structure of a default system should be underpinned by an ambition to create new social norms with the ultimate goal of benefiting the individual, government and society.
So what has happened to the Government’s ambition? The proposed amendment doesn’t appear strong enough to make any significant difference in terms of driving up the numbers accessing pension guidance. If anything, it reinforces the status quo.
For all the hype, pension freedom doesn’t guarantee anybody more money in retirement or higher standards of living. Some people will be making decisions that they will later regret, whether that is being scammed into transfers, paying too much tax on withdrawals, emptying pension pots too quickly or hoarding and living poorer lives as a result.
Some will argue that any intervention by government or regulator in how people use their own money is paternalistic and undermines the pension freedom agenda. In reality, default guidance is its best defence.
Stephen Lowe is group communications director at Just Group