The biggest package of pension reforms in a generation, now just days away, will bring freedom and choice to retirees.
There is no doubt people will have more control over their retirement savings but more choice also means people will have to take more complex – and often irreversible – decisions.
The best place for people to start is with the right information. The Financial Conduct Authority’s (FCA) recent study into the retirement income market asked a series of questions about the information available to help consumers.
The FCA set out proposals for promoting the open market by including quotes from multiple providers in wake-up packs, how information would be provided over the phone and information about products such as drawdown and annuities.
As we gear up for the changes, retirees are potentially facing a deluge of information about their options from wake-up packs, provider advertising and Pension Wise, alongside their own internet research and the media.
So, how can we make sure people get the right information to help them make the best decisions? I have long been an advocate of a pension passport and strongly believe in giving clear and concise information. A single-page pension passport would give an individual all the relevant information and messages to enable them to take the next step.
It should be a key part of the package of material received by those approaching retirement, and the exact wording should be consistent across the industry so there is no possibility of providers adapting it to suit their own purposes at the exclusion of others.
Power and influence
The FCA’s study also considered the influence of framing effects or other biases on consumer behaviour and decisions. They are right to highlight this.
Any time we communicate with consumers, we are potentially influencing behaviour, so efforts should be made to avoid bias in the information provided or inadvertently pushing the customer down a particular path.
But this is not just about the content. It is also about the quantity. Too much information can actually reduce the likelihood that a person will actively engage with a decision.
A few years ago, MGM tested different approaches to wake-up packs to see what might trigger those approaching retirement to shop around.
We took a sample of customers, and sent the first third the normal wake-up pack; the second third a wake-up pack and a set of annuity comparisons from other providers; and the final third received the wake-up pack and comparisons alongside a follow-up call from a customer service representative.
Accepted thinking is that more information does more to encourage shopping around, but we found the opposite was true. The more information people were given, the greater the number who chose to take income from MGM.
More information can actually make the decision seem more complicated, so people will be more likely to follow the path of least resistance and stick with the easy option, even if that is not the best one.
Time to think
We’ve all heard about Nudge theory, from the aforementioned book by Richard Thaler and Cass Sunstein. One of the takeaway points is that individuals are busy, they have lots to think about and not a lot of time to think about it.
The pension industry has to recognise this. Information should be as relevant as possible, and provide a suitable path to follow to help individuals move through the process.
Retirement income decisions are big decisions, and the choices available can have complex and often irreversible ramifications. The pension freedoms may mean consumers increasingly look to tailor retirement income solutions to personal situations and to revisit the choices made if situations change.
We as an industry should tailor information too, while keeping it as concise and clear as we can. We must try and equip people with the tools and the information they need to make the best decisions they can, but we should also help them understand they will need expert help.
This sounds like the best possible advert for professional financial advice.
Andrew Tully is pensions technical director at MGM Advantage