People like choice but are afraid of taking decisions.
This paradox has puzzled pension people for a long time. People think that having 170 fund choices on their personal pension is good news, but 90% of us make no choice at all.
There is plenty of choice of workplace pension providers but it wasn’t always so. If you’d asked most experts back in 2010 (including former BBC economics editor Hugh Pym) what auto-enrolment’s all about – they’d have said “NEST”.
NEST did a good job of unravelling itself from “auto-enrolment” and you don’t often hear people saying “we’re doing NEST” anymore. Employers are getting wise to the fact that they have choice.
I don’t think there’s been much formal research about whether they are happy to have choice, but I suspect that as they’re people, they’ll be happy to have choice but afraid of using it.
The super-employer’s pre-select
Exploiting this fundamental flaw in human nature, super employers have decided to set up default pension arrangements – pre-selected by the super-employer.
I’ve written lots about this- typically in derogatory terms; though in truth, taking choice away from people is precisely what auto-enrolment is mostly about.
Perhaps I’ve been too hasty. Perhaps we are expecting too much from small employers. Perhaps they are no more capable of choosing good from bad than their employees. Infact I think this very likely, employers being people.
The question I’ve been asking is whether we can engage these “employer people” in the importance of choosing, whether we can educate people about the choice and whether we can empower them to make a choice. I have come to the conclusion that the vast majority of these “people employers” will not be engaged, won’t get educated and won’t take any choice at all.
What can we do for such employer people? One answer is to engage,educate and empower the super employers on what makes for good. At least that would narrow down decision making to the 100,000 or so accountants and other business advisers. It might be even easier to deal with the 1000 or so trade associations or even the 100 or so payroll software providers who make the administration happen.
The trouble is that the accountants and trade associations and the payroll software providers have not engaged , got educated and found a way to take decisions on behalf of all the employers in their care.
So I don’t really put my trust in super employers.
Another answer could be to put the decision making in the hands of Government. This could mean licensing pension providers and only allowing them to offer pensions if they meet quality standards. Infact this is what is happening, though the licensing system isn’t working very well, judging by the explosion in the number of schemes being marketed to small businesses.
The Government could be even more drastic and suppress choice to one provider (NEST), or maybe a troika permed from 4 or 5 of the biggest providers in the market.
This might make choice a lot easier , but it runs the risk of market failure from one provider that could be catastrophic. The more you concentrate decisions around a small number of providers, the more likely that market failure is.
I can’t see the solution resting with Government intervention EITHER
So WHAT’S THE REAL ANSWER?
All decisions in the final analysis – are taken by people. Employer people will, left to their own devices fall in line with the 90/10 default strategies adopted by workplace pensions and indeed by the Government. 90% of employers like their staff, will leave it to the default.
But there’s a little twist in the tail for employers. They are taking decisions on behalf of their staff. Whether they like it – they are accountable to some degree.
Where regulated financial advice is given in this country, the adviser is required by the FCA to deliver a “reason why” letter to the client. The reason why letter simply indicates why it is that a course of action has been recommended.
Maybe the balanced view on choice reverts to this.
“Where an employer has chosen a workplace pension scheme, he should provide clear of evidence of why that scheme was chosen and why other options weren’t”.
And nul points for any super-employer who provides a template for the answer!