Timing is everything

Pension freedoms have brought many positive things to pensions scheme members. But the reform also means people have to make sometimes complex and difficult decisions about how and when to take their pension benefits. Often people will need help with these decisions (although some don’t).

The FCA’s latest statistics on retirement income* show that in the 2019–20 tax year, 50% of pension investors didn’t receive any official help when they first took benefits, and 14% of them received guidance from Pension Wise.

The Department for Work and Pensions (DWP) and the regulators want to increase the number turning to Pension Wise for help. When the Financial Guidance and Claims Act 2018 was being debated in Parliament, ministers committed to investigating whether introducing nudges towards Pension Wise increased the number of pension scheme members making appointments.

This research was duly carried out between October 2019 and February 2020 and involved 4,135 individuals. The Behavioural Insights Team led the research for the Money and Pensions Service (MaPS), and the testing was carried out at three companies: Aviva, Hargreaves Lansdown and Legal & General.

When people called to access their pension or enquire about pension options, they were told about the guidance and the call handler either offered to book an appointment for them or they were transferred to Pension Wise to make the appointment themselves.

The research concluded introducing a ‘stronger nudge’ towards Pension Wise worked. On the back of that, the DWP has now signalled its intent to introduce a requirement for trustees and managers of occupational schemes to give a stronger nudge to scheme members to take up guidance before they can either access their pension benefits or transfer to another scheme to access their pension benefits.

But were the trials really that successful? Introducing a stronger nudge certainly increased the number of appointments booked. For both methods tested – whether the member was offered an online booking by the call handler or the call handler transferred them to Pensions Wise – around 14% of members made an appointment, compared to 3% of the control group (who were not nudged towards an appointment). And around 11% kept the appointment. But that means only 1 in 10 actually attended an appointment. This begs the question why is this figure not higher?

The research ran focus groups to further explore people’s thinking. Individuals were split into two groups – those who saw themselves as having good knowledge, and those who had self-perceived low knowledge. It was apparent that both groups had more or less already decided what they wanted to do with their pension benefits when they had the conversation about accessing them. Those who had greater knowledge wanted to explore one specific decumulation option. Those with lower knowledge just wanted their cash and didn’t think there was any value in looking at other retirement options.

This is probably the biggest hurdle ‘nudging’ will have to overcome. By the time people contact their pension provider to ask for a transfer or access benefits, they have already made up their minds regarding what they want to do. Nudging them at that point is never going to get much traction. Instead, people will just see it as an impediment standing between them and their tax-free cash.

The Government is considering more forceful nudging – would that be ‘shoving’? – for example, not allowing some transfers to go ahead unless the individual confirms they have received guidance or opted out.

But, again, if the nudge is offered at the point of transfer or access, there’s the risk individuals may just go along with it purely to forward the process, to tick a box, but it won’t alter their made-up mind. Even if the individual listens, will Pension Wise be able to turn around their intention? Remember, Pension Wise cannot categorically say to someone “You should do this”. Instead, it can only give information.

Timing is everything. Instead of putting barriers between people and their cash, can we nudge them towards guidance before they make their minds up? Some may argue that the new-format wake-up packs are trying to do that, but perhaps something other than a nudge from providers is needed. For example, a 50th birthday present of a nudge from the Government, or even employers, might be more effective. Doing that may help prevent people from making poor retirement decisions, and it may also help stop them falling for pension scams as well.

The DWP and the regulators are currently busy working out how stronger nudging – or shoving – can work in practice. The DWP will publish regulations on this very soon, with the FCA to follow soon after. One thing is for sure: many more people wanting to access benefits or transfer will be nudged to Pension Wise – whether they have an adviser or not.

* FCA Retirement income market data 2019/20 29 September 2020

This article was previously published by Money Marketing