I went to an excellent panel debate last night which was asking whether behavioural finance could improve pension outcomes – well DC outcomes – which as one panellist pointed out hadn’t got much to do with pensions!
A lot of the panellists talked about how they’d exploited/used/finessed behavioural techniques to achieve desired outcomes and the evidence of the power of inertia was clear.
It was clear too that “poor” behaviours could be changed to good behaviours through either using smart technology, smart communications or smart salesmanship.
Being smart at understanding how people react to things is of course nothing new. Call it emotional intelligence if you like, but the kind of genius that puts the blue into Persil powder or gets “marmite” as an everyday descriptor is a very rare and special intelligence (and it’s not artificial).
Behavioural economics are taught to salesman in their inductions. The various closes I learned when I was taught to sell on the doorstep are now hard coded into me. They are how I get my way.
Interestingly, when I use these closes I am often described as bullying. That is the clumsiness of allowing others to see they are being sold to. The best techniques we saw last night were not obvious , they were so subtle that one of the panellists labelled them “Paternalistic Coercion!!
Behavioural economics informs the salesman and is at the heart of the marketing process. But it is only a tool for implementing strategies. The strategies themselves are all the more in need of proper governance where “nudge” strategies are employed, since their is commensurably less friction in the decision making process.
So for this paternalism to be benevolent, there must be a higher level of governance that ensures people don’t end up with bad products.
I made the point last night
PPI relied on desperate borrowers and was (generally) a bad product sold through inertia
Grooming relies on insecure young people and is a criminal activity that works through minimal disturbance.
Many Workplace Pensions are set up by employers for staff based on ease of use.
What nudge and inertia selling do
Nudge gives the impression that a choice has been made, (7m people have joined workplace pensions). But the choice is not made and the impact of the choice is deferred. You have to nudge a long way for people to notice what being in a workplace pension means.
Nudge and inertia selling assume good outcomes but they do not create good outcomes, they just change behaviours.
The moment that the Government allowed choice into the equation, and employers had to choose a workplace pension for their staff, a new element emerged. There was no qualification on what should be chosen , the employer did not need to chose a “good” or “suitable” pension, they just had to choose a “qualifying workplace pension”.
But the rules of “qualification” could hardly be described as onerous, there was no question about suitability or quality, all that was needed was a vehicle that took money and invested it in a compliant way.
Nudge and inertia cannot define what makes for good
The critical mistake in auto-enrolment was that when choice was introduced, there was no mechanism established to measure suitability, quality, security or sustainability. There was no measure of value for money, there wasn’t initially rules about charges or how workplace pensions rewarded the sales guys. We had drunk at the fountain of behaviourism and got drunk on the cool aid.
I asked a prominent workplace pension provider if he was worried that so many of his participating employers had no idea whether his product was good or bad. He answered “no”, he had great conviction in his product and his fiduciary process.
But I know he does not know his customers – other than through market research. He does not know the employers and he certainly doesn’t know his members.
He is relying on a decision making infrastructure built entirely on trust. But that superstructure is not necessarily to be trusted. PPI was bought on trust, child molesters are let through the door on trust, it is possible for workplace pensions to auto-enrol ordinary people with the same wicked consequences.
There has to be a fiduciary purchaser if Nudge is to work.
In last week’s debate on whether an employer has a duty of care to choose a suitable pension, Richard Harrington (the Pensions Minister) claimed that the information made available on tPR’s website was sufficient for small employers to make smart decisions.
It is not.
The employer is given no practical assistance by Government in choosing a workplace pension suitable for staff beyond some basic compliance checks (MAF, IGC, Charge Cap, contribution process)
This is not enough to prevent a bad decision being taken (let alone to help a good one).
There will come a time when employees will ask why his or her employer chose the pension it did, and there will usually be no answer. There will be
- no reason why letter
- no professional sign off
- no evidence that due diligence has been done
- no memory of what went on (assuming decision makers move on)
I came away from the meeting , impressed as ever by the power of behaviourism but depressed by the lack of thinking around the fiduciary structures that employ these behaviourists to change the way we do things.
Whether at Government level, at provider level or at employer level, we seem to be measuring success in terms of compliance with the rules and ignoring whether the outcomes are good and bad.
People have choices to opt-out and have every right to ask what they are opting into. They generally don’t because they trust employers to choose carefully.
We must address the question of how our workplace pension are being chosen. We must think while we nudge, we cannot allow auto-enrolment to be unbenevolent coercion. We must introduce friction at some point – some due diligence.
Otherwise AE is simply a marketing trick, a sleight of hand and a recipe for recriminations at a later stage.