Call for ban on cash incentives for pension switching

Research by the company behind The People’s Pension master trust, in collaboration with Behavioural Insights Team, found that cash incentives were more likely to make people switch pension provider without reading the small print first.

Participants were 20% more likely to transfer their personal pension with a cashback offer of £100, the research found. This was despite the question stating that the charges in the new pension would be higher than the existing pension.

The researchers calculated that the higher fees could result in a 55-year-old person being more than £1,000 worse off after five years if they chose to switch in this scenario.

People’s Partnership called for switching incentives to be banned “given the clear role they play in inhibiting people’s likelihood of reading the small print – critical details which make thousands of pounds of difference to a pension at retirement”.

Patrick Heath-Lay, CEO at People’s Partnership, said: “Healthy competition between pension providers should be based on the quality of pension products, not marketing tricks that exploit flaws in the way people think. We believe this research highlights practices that are contrary to the FCA’s Consumer Duty.”

He also highlighted the importance of transparency and comparability in the context of the value for money reforms currently being developed by the Financial Conduct Authority and the Pensions Regulator.

“We support moves by government and regulators to make value for money in pensions more transparent and comparable to the consumer,” Heath-Lay said. “As it stands, the transfer market is too stacked in favour of pension providers, rather than in the interests of the consumer. This urgently needs to change.”

The research was carried out between September and November 2023 and involved 5,687 adults. They were asked to consider the scenario of a 55 year-old person who is encouraged to switch provider to take advantage of a £100 cashback offer, but with the receiving provider charging more.

“The experiment did not incorporate ongoing contributions and so, particularly if the transfer happened further out from retirement, the shortfall could be much larger,” People’s Partnership’s statement said.

Further reading:

Consumer Duty: FCA’s overhaul will force financial services companies to ‘up their game’ (31 July 2023)