An excess of information on the pension freedoms risks poor outcomes for “procrastinating” defined contribution savers, experts have warned, meaning the industry must improve member communication and engagement.
Schemes were also encouraged to consider smart defaults as a way to reduce pressure on those approaching retirement.
Too much information gets in the way of decisions. People are really worried about post-purchase remorse
Andy Cheseldine, LCP
Research commissioned by investment manager State Street Global Advisors and mastertrust The People’s Pension found that 63 per cent of respondents had begun actively considering how to take their pension under the 2015 reforms.
Earlier this year, The Pensions Advisory Service announced a 71 per cent increase in enquiries since the introduction of the reforms.
Many savers, labelled “Procrastinating Petes and Paulas” by the study, are seemingly overwhelmed by the complexity of the choices facing them, and are likely to take 25 per cent of their pot early without knowing what they want to do with it.
Earlier this year, The Pensions Advisory Service announced a 71 per cent increase in enquiries since the introduction of the reforms.
Many savers, labelled “Procrastinating Petes and Paulas” by the study, are seemingly overwhelmed by the complexity of the choices facing them, and are likely to take 25 per cent of their pot early without knowing what they want to do with it.
Respondents said they were worried the rules might change again, or even that they might lose their money.
Industry responsibility
Richard Butcher, managing director at PTL, suggested that scheme providers should be driving towards better outcomes rather than focusing on members’ procrastination.
He said: “Let’s not blame the members. If they’re paralysed by a decision it’s not their fault, it’s our fault.”
Alistair Byrne, Senior DC Strategist at SSGA, agreed: “We need to better articulate the choices people face – including the option to leave money in the pension scheme until it is needed – and to adopt clearer and more consistent language in our communications.”
Research indicated that savers found resources like Pension Wise, the government’s online guidance service, to be useful, and schemes were urged to point members towards it.
But complex additional resources were blamed for causing member confusion, along with perceived uncertainty over the impact of events such as the EU referendum.
“Too much information gets in the way of decisions,” said Andy Cheseldine, partner at LCP. “People are really worried about post-purchase remorse.”
Cheseldine added that schemes providing alternative guides to pensions freedom must be “prepared to spend enough money to build something that’s better than Pensions Wise.”
Experts agreed that many scheme providers are including too much jargon and excess information in their communications to members.
“What they should be doing is talking in the member’s language, in formats and at times that work for them,” said Simon Grover, senior writer at Quietroom. “Your scheme should be able to send you tailored information instead of an encyclopedia.”
He linked the high levels of survey respondents taking 25 per cent of their pot as cash at 55 with the relative ease of understanding the term ‘cash’ when compared with ‘annuity’ or ‘income drawdown’.
‘Smart’ defaults
Smart defaults were also hailed as a way for scheme providers to ease the decision-making process of members.
Introducing automatic derisking of a saver’s portfolio through retirement could encourage them to leave money in the scheme until they need it, while reassuring them that the scheme’s governance will deliver returns.
Many schemes have existing provisions for how to handle savings that have not been accessed by the time a member reaches 75 years old.
Butcher said a current lack of legal framework might prevent trustees from implementing a default earlier in the process.
“In order for smart defaults to work, we also need a safe haven environment for fiduciaries to operate in,” he said.
He added that members might confuse the word ‘default’ with debt, and called for further clarification of industry jargon.
Others said the current diversity of scheme demographics makes it difficult to optimise an investment strategy for all members.
Instead, said Darren Philp, director of policy and market engagement at The People’s Pension, a more plausible central default would be “a ‘keep your options open’ fund”, offering savers flexibility when they do make a decision.
