The need for long-term thinking, not short-term incentives

The People’s Pension aims to lead the industry in driving positive change

While your workplace pension fulfils all your regulatory requirements, it’s also a valued employee benefit package that helps to attract new talent and build team morale. So, getting it right for your employees is vital to the culture of your organisation as well as for their financial futures.

As a workplace pension provider with over 40 years of experience providing pensions, we focus on long-term strategies and always place our members at the heart of everything we do. That’s why we’re concerned about the proliferation of short-term switching incentives. Some of these offers might sound great upfront, but after reading the small print and researching member outcomes, we’re calling for incentives on pensions transfers to be banned, and many within the industry agree with us.

If we take the latest Pension Buzz survey1 as an example, it shows strong support for a ban, with over 6 in 10 industry respondents in favour. Such practices are often used to encourage pension transfers, but the latest research backs up our assertion that, over the long term, savers are losing out

Money for nothing?

The complexities of pension transfer fees cannot be overstated. For instance, a 30-year-old earning £45,000 moving a £50,000 pension pot from one provider charging 0.4% to one charging 0.75% would see a significant reduction in their retirement savings by the time they retire at 67. They would lose a whopping £72,689 due to the increased charge. Without proper education on these implications, consumers face unnecessary financial risks, especially when blinkered by short-term gain.

The impact of these incentives on consumer decisions is concerning. Participants often receive minimal risk warnings, leaving them unaware of the potential long-term costs. The Financial Conduct Authority (FCA) shares our apprehension, highlighting that incentives can drive transfers for the wrong reasons.2 And our own research, undertaken by the behavioural science specialists – the Behavioural Insights Team (BIT) – backs this up.

Participants were shown adverts and text messages about transferring a £50,000 pot from a provider charging 0.5% to one charging 0.925%, with some offers including £100 cashback. One in 5 were more likely to transfer due to the cashback, despite higher fees making them over £1000 worse off after just 5 years. This suggests the £100 incentive was a significant driver, highlighting practices that may violate the FCA’s Consumer Duty.

Education, transparency, and beneficial member outcomes

The FCA’s regulations aim to protect consumers by ensuring reasonable charges in the pension market. However, there’s an urgent need to raise awareness about the long-term consequences of switching pensions based on short-term incentives. As we near the implementation of pension dashboards, which should make pension transfers easier, it’s crucial to guard against decisions driven solely by immediate gains.

The People’s Pension advocates for a shift towards transparency and consumer education, prioritising these over temporary incentives. As a not-for-profit company, we’re able to use our profits to reinvest in our proposition to build the tools members need to make informed decisions about their long-term futures. We’ve already rolled out retirement planning tools, pension and retirement planning videos, and a financial wellbeing hub so our members can make the best choices now, at retirement and beyond. By actively informing your employees (our communications toolkit is here to help), you can also support this approach, thereby safeguarding future savings and fostering trust in the pension industry. This approach encourages employees to think long-term and ensures that their financial well-being is not compromised for short-term gains.