More information doesn’t lead to better outcomes

One thing our industry is very good at is giving members information. And we provide lots of it. In fact, sometimes I think we’re too good at it and all this information is actually to the detriment of pension savers.

It’s a bold statement to make, but I feel somewhat justified in making it following my attendance at a Pensions Age DC roundtable event and recent announcements from pension policymakers.

Let me give a few examples of where shorter, simpler communications might actually help savers.

The annual Chair’s statement, often found within yearly scheme reports, is meant to be a member- facing communication piece. It provides many important updates but, if we’re being honest, I doubt many members have ever read it. It’s simply become unwieldly for the lay-person with no real understanding of pensions. DWP’s recent report on the Chair’s statement is welcome recognition that it isn’t working as they had hoped.

Another document that’s expanded beyond its original purpose is the annual statement. That the DWP are looking to introduce a simplified annual statement for all DC pension schemes is, again, acknowledgement, that simply bombarding members with more information is not the right approach.

And let’s not forget, work is progressing on the pensions dashboard project – an online tool that, once launched, will provide a massive opportunity for savers to engage with their retirement planning in a simple and easy to understand way.

Of course, the idea of providing more information comes with good intentions. The theory goes that if we tell the story of how savers’ money is invested, the role trustees play in looking after it, how savers can boost their retirement pots, as well as steering clear of scams, savers will feel more engaged and confident dealing with pension matters.

But that’s not always the case.

There’s a realisation in the industry that savers need more help getting to grips with their pension. And what’s pleasing for me to see, is that this doesn’t mean throwing more information at them. Even when members become engaged, we shouldn’t expect them to be experts.

And for the engaged and non-engaged members approaching retirement, we can’t simply give them more information and assume they’ll make the right decisions. Our New Choices, Big Decisions research has given us a unique insight into the challenges faced by those approaching retirement as well as the decisions they typically make.

It revealed that:

  • Many older workers are ‘sleepwalking into retirement’.
  • Nearly three quarters of those interviewed (74 per cent) are spending their pension savings at such a speed that they’ll run out of money with, on average, up to a third of their retirement left.
  • Savers are scared of planning for the future as they don’t want to discover the ‘truth’.
  • They underestimate the financial risk of growing old and don’t understand how inflation can impact their savings.
  • The typical saver follows the path of the least resistance – they won’t leave a product or change a drawdown withdrawal rate once they have signed up.

These findings suggest that savers need help from the industry to get the best possible outcome for their individual circumstances. That help has to come in a variety of ways, whether that be with printed documents, online portals, financial advice or nudges through retirement pathways. This is no small challenge.

The first step has to be in giving members the right information at the right time and, importantly, in a way they can understand.

What I particularly welcomed out of my attendance at the roundtable event was how willing everyone across the industry is to deliver better outcomes for members through clearer, shorter and more concise communications. 

For those interested, a full write up of the event – where such topics plus more were discussed – can be found on the Pensions Age website.

Why an overhaul of annual statements is the first step towards better disclosure of information

More than three years on, the 2017 review of automatic enrolment is beginning to have an impact on the sector.

The Department for Work and Pensions (DWP) remains committed to the main proposals in the medium to long term: removing the lower qualifying earnings band and lowering the age threshold to 18 but we expect these in a future Pensions Bill. They seem to have been justifiably delayed by the fallout from the pandemic. However, the Government has chosen to force the pace on the main proposal from the review’s engagement strand, the simplified annual statement.

This simplified annual statement is a standardised annual statement. It covers two pages and is designed to show the information required by law to be in a statement in a way that enables comparison between different schemes.

End the use of jargon

Between the end of 2017 and autumn last year, the Pensions Minister Guy Opperman and the DWP tried to encourage the industry to adopt the simplified statement, with the former expressing his disapproval at ‘jargon-filled, confusing statements’.

While a few providers have adopted the new document, most have stuck with their original statement. More than a year ago, the DWP consulted on the way forward and published its response earlier this year, which served to underline how the department has lost patience and is now looking to mandate the statement, meaning that providers will be compelled to introduce it.

So how has it come to this? Providers have three main reasons for not adopting the statement. Firstly, statement overhaul is regarded as being too expensive. One of the major life houses completed a full revision of its statement recently at considerable cost. It’s hard to make a case for putting the statement up on bricks again so soon after completing a major revision of product documentation.

Secondly, some companies have expressed concern over the quality of the simplified statement. Innovation is increasingly a feature of our industry and there’s an increasing move towards online and video communication of core pensions information and there are some who believe that the way they do things now has advantages over the simplified statement.

The introduction of dashboards

Lastly, there are pensions dashboards, which are likely now to go live from 2023 and will allow people to see their pensions entitlements together on one online portal. With high levels of internet access now throughout the UK population, it seems probable that dashboards will replace both paper and electronic statements as the main way that people get information about their pensions.

Dashboards have the potential to completely reshape the way that people interact with their pensions and may render current approaches to communications with members redundant. An obvious question to ask would be ‘why do you need a paper or electronic statement if you can just look up the relevant information online with a few key strokes?’ with the follow up of ‘when did you last look at a paper bank statement?’ What really needs to be considered with the introduction of dashboards is a full review of all the information we, as an industry, share with pension savers, not just annual statements, and when that information is released. Instead of sending an individual annual statement, why not point them at a dashboard so they can see all of their pensions in one place?

We’re now waiting for the DWP to bring forward a new consultation paper on the simplified statement and this could in turn be followed by regulations which might mandate them.

This should prompt more debate, not only about the adoption of the statements, but also about the disclosure of pensions information more generally. Hopefully the new consultation could result in improved annual statements becoming a stepping stone to improving the way that the pensions industry communicates with retirement savers as we move into the dashboard age.

Consumer protections will be key to pension dashboards

Why consumer protections will be key to the success of pension dashboards

Eyebrows were raised when the House of Lords chose to amend the Pensions Schemes Bill, inflicting four defeats on the Government in the process.

There will be those who will argue this was odd as the Bill contains many things that people from the main parties actually want. It includes provisions both to enable Collective Defined Contribution (CDC) and underpin pension dashboards. Each one commands cross party support.

Viewed from another angle, the two defeats on the pension dashboards part of the Bill reflect long held concerns about how dashboard users’ interests will be protected. From this viewpoint, the defeats are much less surprising. The amendments added to the Bill are not intended to prevent commercial providers from operating pension dashboards. Rather, they’re intended to prevent commercial dashboards becoming operational until user behaviour is well understood and there’s a consumer protection regime in place to regulate ‘transactional’ dashboards.

Pension dashboards will allow savers to see all their pension entitlements in one place in an online portal and, eventually, users will be able to use these dashboards to transact, perhaps by consolidating their pensions. Users will have access to financial planning tools and potentially access new products in a similar way to open banking.

Many people involved in the debate see transactional dashboards as a desirable destination for the pension dashboards project. It’s easy to see how savers might benefit from using these sorts of dashboards to plan and to act.

Progress on the technical side but concerns remain

Work on the dashboard infrastructure is now gearing up with Money and Pensions Service (MaPS) stepping up its engagement with the pensions industry on data quality and readiness to comply with the requirements of the Bill. MaPS’ officials have also begun talking to potential suppliers of the IT infrastructure that will underpin dashboards. We expect real progress by the end of the year.

The first iteration of the dashboard will be ‘find and view’. This will display people’s pension entitlements online in a comprehensible format. Getting there will be a massive technical feat but it’s not really what’s prompted the debate in the Lords.

What concerns politicians in the House of Lords and stakeholders in the pensions sector is what happens when providers get the green light either to build transactional dashboards or figure out how to build transactional services that are adjacent to a ‘find and view’ dashboard service. Some are as worried by the potential pitfalls as they are enthused by the would-be positives of this.

Transactional dashboards or transactional services adjacent to a ‘find and view’ service will create a much more liquid market in pension transfers and with that market will come new risks. These new risks will depend on what dashboard providers are allowed to do, how their conduct is regulated and the extent to which consumers are enabled or encouraged by dashboard providers to take action across existing regulatory and product boundaries. These boundaries are highly salient to pensions professionals, but pretty meaningless to most savers.

We think there are three sets of issues that policymakers will want to consider:

  • Firstly, dashboards have the potential to blur the lines between workplace and non-workplace pensions. Charges in a trust-based workplace pension average 42 basis points (bps), while, according to a study by the Financial Conduct Authority (FCA), charges in a non-workplace pension average more than 100bps. This reflects both a much more competitive marketplace for workplace pensions and tougher statutory protection on charges and more stringent governance requirements.
  • Then there is the fact that they have the potential to blur the lines between FCA and TPR-regulated pensions. Each are subject to differing levels of regulatory protection. One is fundamentally paternalistic, the other is much closer to a regular service market, which envisions an informed consumer.
  • Finally, dashboards potentially blur the boundaries between different types of pension entitlement. We’re less concerned about this as issues with DB transfers are better understood and there is strong opposition to putting CETVs on dashboards.

It’s easy to see how dashboards might encourage or ‘nudge’ savers to consolidate onto a dashboard operator’s platform. That might be of enormous benefit to the saver. Equally, it might do them considerable harm as they consolidate funds from a tightly regulated, cheaper pension scheme into a more expensive, less well governed product. It isn’t obvious how those risks can be mitigated yet and we’re in the foothills of understanding how savers might act and what sort of provider behaviour might be acceptable and what might need to be constrained.

Watch and wait on consumer protection response

The current Bill contains provisions that could enable a tough consumer protection regime that weighs the risks outlined above. The current position of the Government is that operating a pension dashboard should be an activity authorised by the FCA but that activities enabled by the dashboard – like transfers – should be governed by existing rules and legislation.

Judging by the scale of the defeats in the Lords on 30 June, it seems that there’s appetite for a consumer protection regime that goes beyond existing measures. This is partly informed by the pension freedoms, where existing regulation proved insufficient to prevent serious harm to many who transferred DB pensions to poorly run self-invested personal pensions (SIPPs).

It will be fascinating to see whether the Government chooses to bring forward a consumer protection regime that allays the concerns of Peers or whether it uses its majority in the Commons to reverse its defeats.