“We are going to need a bigger intervention.” – Stephen Lowe
Stephen Lowe shares his views on the Money & Pensions Service ‘stronger nudge’ research and urges all parties to think big when it comes to the take-up of retirement guidance
The most famous line in Jaws is when the hero, reeling from his first close encounter with the murderous great white they are hunting, backs into the cabin and mumbles to his captain: “You’re gonna need a bigger boat.”
These words came to mind after reading the ‘stronger nudge’ paper from the Money & Pensions Service (Maps) revealing the outcomes of trials to boost take-up of pension guidance.
While the results are positive in an academic sense, they don’t come close to addressing the scale of the real-world problem. The final conclusion of this study should be – we are going to need a bigger intervention.
First, a reminder of why all of us in financial services have a strong interest in the subject. There were two key planks to the 2015 pension reforms, ‘freedom and choice’ and the ‘guidance guarantee’.
Chancellor George Osborne promised everyone retiring with a defined contribution pension “free, impartial face-to-face advice on how to get the most from the choices they will now have”. This was a clear recognition by the architect of the plan that people would need to be equipped with information and explanation to give them a chance of making good decisions.
Pension Wise, the guidance service, is the manifestation of this promise and the primary consumer protection for the estimated quarter of a million people who access a pension each year without taking regulated advice.
Despite rave reviews from those who use it, estimates of take-up are low at about one in seven of those accessing pensions each year.
Guidance is not regulated advice, of course. But it has the potential to be a good entry point. As MPs on the Work and Pensions Committee noted in the 2018 Pension Freedom report: “Informed and confident savers are more likely to take up financial advice.”
Among Pension Wise appointment bookers, 74% said they would pay for advice that was reasonably priced.
The bigger picture is that these are early days for pensions freedom, perhaps too early to see cracks forming. Professional advisers and their clients are among the obvious winners, but any signs that large swathes of ‘Middle Britain’ are not sharing the benefits due to poor choices will bring the policy into question.
The Maps ‘nudge’ trial, overseen by the Behavioural Insights Team, covered those who had not already received advice or guidance. They tested two scenarios: the provider offering to book a Pension Wise appointment for a customer, or a warm transfer to Maps to make the appointment. The results were compared to existing signposting to Pension Wise which is prescribed by regulations.
The results were similar for both scenarios. After six weeks, about 14% of customers booked appointments and about 11% had attended an appointment. That compares to 3% booking and 3% attending in the control group.
In the world of behavioural economics, a near quadrupling in take-up compared to the control group is a good result. But in the real world where people have the juicy carrot of pension cash dangling in front of them and may face a bleak retirement from poor financial decisions, the result should be marked ‘could do better’.
Even if we could increase take-up from one in seven to (an optimistic) one in four, that still leaves the vast majority with no support to help them make complex decisions.
An ‘opt-in’ system is never going to work because some people, often the most vulnerable or those with lower levels of financial capability, will not engage even if it is obviously in their own best interests.
We already have a successful model for the bigger boat that is needed – auto-enrolment. Millions more employees now save into pensions and few go to the trouble of opting out. This is also the model behind ‘default decumulation pathways’ that ensures pension cash is not left languishing in low interest cash accounts.
It would make sense to join up pension policy by using the same model to transform take up of impartial pension guidance to two or three times its current level. If you are looking for a target number, then the regulator should be thinking about auto-enrolment levels of take-up rather than those produced by the latest Maps trial.
Let’s welcome them aboard.
Stephen Lowe is group communications director at Just Group