The industry is sending out the wrong message on pensions
Pension saving has responded well to behavioural nudges from auto-enrolment. Now we should build on this success. Millions more people are putting money aside for their retirement, which could offer exciting opportunities for advisers and pension providers. But capitalising on this situation requires new thinking.
So far, providers have been astonishingly slow to reform products, services and communications. Regulators have also been behind the curve in protecting consumers and encouraging more take-up of both advice and guidance. For example, the FCA is still focusing on “disclosure” and “informed choice”, without recognising that reams of paperwork full of impenetrable jargon will not protect consumers who cannot make sense of it.
Take the so-called “wake-up packs” the regulator requires providers to send out at least six months before the customer’s pre-selected pension date. The packs are meant to disclose all the relevant information for customers to make the right choice with their pension pot but they are full of unfamiliar terms like decumulation, annuity, drawdown and guidance.
What wake-up packs should tell people is how much is in their pension fund, what terms are attached to their product, how best to use their pot to last through retirement and how much regular income they might achieve.
And behaviourally, it is all wrong. The message they are getting from the packs as they stand is their pension is almost over. They will soon stop paying in and can start taking money out.
But these dates may well have been chosen decades ago. Most people at this stage are in the mid- to late-50s and still working.
Surely, the behavioural message is if people plan to keep working there are huge advantages in contributing to a pension fund for longer.
Behavioural science suggests sending wake-up packs when people are eligible to take money out will nudge them towards doing so. A much better approach would be to send a wake-up “message” at, say, age 50, encouraging people to consider a mid-life MOT to review their wealth and health for their future.
The communication can focus on how much they have built so far and offer them a free guidance session from PensionWise, as well as recommend the benefits of taking independent advice.
Advisers will help clients plan prudently, invest wisely and make the most of the “free money” available from tax breaks they may otherwise miss out on.
The behavioural message would be turned round. The focus would be on the reasons not to take money out of pensions too soon, rather than how to take it as quickly as they can.
Tying wake-up messages to taking advice would also be a big step forward in helping more people plan their retirement properly, rather than sticking to traditional methods which fail to focus on the new opportunities for flexibility and choice.
So let’s harness the power of behavioural thinking beyond just the stage of auto-enrolment. After all, the most important aspect of pension savings for many people comes in later life.
Inertia is fine at the beginning, but it needs to be integrated with workplace financial education and new thinking from regulators to encourage better engagement and ongoing contributions in later life.
Ros Altmann is former pensions minister