The default option

Iain Clacher, Janette Weir

We have spent many years talking in depth with over one thousand people about their defined contribution (DC) pensions as part of our work for regulators and providers. And our conclusion is that there is little chance of getting people to be ‘engaged’ with their pension of their own accord. This is a bold statement to make, so let’s have a look at the reasons why.

Many people simply don’t trust pensions, and it’s hard to be proactive and positive about saving into something you fundamentally just don’t like. The manifestation of this undercurrent of mistrust came when pension freedoms allowed people to access their DC pot – and they did in droves.

Some £10bn has already been withdrawn, many people were more than happy to pay a big tax bill to get the money out and under their own control, when the rational thing was to leave the money invested for their retirement. People also tend not to engage with things that they perceive to be too difficult, and pensions are usually described as a “minefield”. It is hard enough for people to get to grips with all the jargon, and then the rules keep changing. Even the word ‘pension’ is off-putting and confusing. It is no wonder that it comes as a big shock to some to find out that their DC pension pot doesn’t automatically convert into a regular payment at retirement.

We observe that most people only start to have a passing interest in their DC pensions from around age 45 onwards and really start to have an active interest around six months before they want to access it.

Worryingly, many of those who are so disenchanted with pensions that they have “taken control” of their money are not acting like ‘investment managers’. They put their pot into cash ISAs or high interest savings accounts (which they do trust and understand) but once the money has been parked, they are not making sure that it is working as hard as it can by shopping around for the best interest rate deals on an ongoing basis. More worrying yet, an awful lot of people who have made more complex choices than this, typically some form of flexi-access drawdown, are simply ‘hoping for the best’.

A revamp of annual statements to help put people in touch with their future selves is desperately needed, given how badly they do this at present. There is already some interesting work underway to look at better timings, linking to future goals, talking statements to improve understanding, and so on. However, much more work needs to be done.

Policy interventions such as a default financial health check would be extremely helpful. We firmly believe that this intervention is needed at an earlier stage, long before the money has been mentally allocated to a new car, or holiday, or kitchen. Perhaps 50 is the right age, rather than 55, well before people can access their pension.

We observe that many people who are making full or partial encashment decisions between the ages of 55 and 59 have a very firm plan in mind from the outset and, therefore, do not feel the need to use Pension Wise, the government’s guidance service. Or they are using Pension Wise far too late in their decision-making journey, which makes it almost impossible to shift their perspective.

Choice overload, due to the plethora of options now open to people, is just adding to engagement problems. Some pension savers are almost begging the industry for a path to follow.

We must be up for this difficult task. The window of opportunity is closing rapidly, as the next generation coming through will be mostly reliant on defined contribution for their retirement income. The next five years is critical, and the cost of being no further forward in this area is simply too great, both for the well-being of individuals and for society as a whole.

Janette Weir and Iain Clacher have written a chapter for the report, Saving for the Future: Extending the Consensus on Workplace Pensions, published by the Fabian Society and Bright Blu

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