This is the 4th of eight blogs considering the questions put to us by the Work and Pensions Select Committee.
Today’s exam question…
How can savers be encouraged to engage with their savings?
Quick answer; either we can convince people to engage directly with their investment, or we can get people to engage with stewards or we can offer digital engagement. But we should be wary of ever expecting most people to pay much attention to their pension, most people just want to “know where to sign”.
People like owning possessions, but how many people would count their pension fund as their possession?
There are real problems with agency here. In practice very few people choose the assets into which their pensions invest, the complex array of intermediaries within a modern day SIPP, show just how far from the asset, the beneficial owner of the SIPP has drifted.
“SIPP” stands for self-invested personal pension but in practice there is are at least five intermediaries between the investor and his/her money.
This perplexing complexity is the result of competing claims from each intermediary for hegemony in the client relationship. But in practice it is only the financial advisor who directly communicates with the investor.
If we are to get people back in touch with their savings, we are going to have to do something about these multiple agents. We need to get back to owning our pensions and that means having clear visibility about where money is invested.
People want to invest well
At a recent meeting of the Defined Contribution Investors Forum, Ignition, a communications company, demonstrated the frustration ordinary savers had , when wrestling with where their money was invested. A common thread to interviews was that people assumed their money would be invested responsibly. When they found that this was an “optional extra” they became agitated and even angry.
People do not expect to have their money invested in arms , or with polluters or in organisations that don’t behave responsibly to their staff, customers or shareholders.
In contrast , when investors were shown that they were invested in projects with a strong social purpose, they were proud, wanting to explore their ownership, eager to do more of the same.
Share Action have been making this point for many years. If we want to engage savers, especially younger savers, we need to get them involved in the story of their investments. We need them to be able to explain what they are doing to themselves and others.
But the problems of agency too often prevent this.
The alternative way
Over the past four years I have been investing with Legal and General and am proud that I am now investing my workplace pension in a fund called Future World, I am an evangelist for this fund which was created for HSBC’s staff pension scheme by people I know and trust. I am a fortunate person in that I have a clear understanding of the who, how and why my money is invested.
Not only am I invested in it, but my 20 year old son is also investing his meagre earnings in this fund, so are many of my friends. I was really delighted when Pension Bee, who offer a simple SIPP, offered this fund to their investors. I’m proud that one of our clients, RSPB, now offers this fund as part of its default for workplace pensions.
The fund does good things with my money and I am really keen to see how my future contributions are invested. It is fair to say that a really well invested fund, has excited me to save more.
Seeing what is going on
They haven’t done it yet, despite promising me they would. Nigel Wilson and John Godfrey – who are two of the bosses at L&G want to put the investments of L&G on google maps so that as I travel around Britain, they can spring out at me and remind me of what I own.
This – in extreme form – is what I want. Everyone I tell about this get’s excited by the idea. So why hasn’t it happened yet?
I reckon it’s because companies have become terrified of their customers. Legal and General regularly tell me how I – as an adviser – can have access to all kinds of information that adds value to my relationship with my clients, but when it comes to my own investments, I am constantly confronted with warnings that I am not a professional investor and that I should talk with a financial adviser before making any decisions.
I found this problem when I was in Port Talbot. Many of the steel men I spoke to told me that they had workplace pensions with Aviva (Tata’s auto-enrolment supplier). When I asked them why they didn’t use their workplace pension for the investment of the transfer they were taking from their DB plan, they looked perplexed. Not one of them had had this option discussed with them by their financial adviser. Instead they had ended up in SIPPs of the type advised above.
Once again we are allowing the complexities of intermediation to get between us and our savings. Had these steel men invested in the GPP, most would have paying well under 10% in terms of charging, and they would have had direct access to information on the funds into which they invested.
I am coming to the conclusion that nobody, not the intermediaries, the regulator or even the employer is particularly interested in direct investment. When I asked Aviva why the website they had put up for Tata staff, had not been advertised as part of the “Time to Choose” communication program, I was told that neither Tata or Aviva were wanting to promote what would have been seen to be a “non-advised solution”.
How do we dis-intermediate and find our way back to our savings?
If my contention is correct , then I think it is time we started investing, not on the basis of abstract concepts such as “anticipated returns”, “attitude to risk” and “risk models” , but into things we understand.
2. Trusted stewards
The direct ownership model – outlined above – represents ideal engagement. But as mentioned immediately above, it is unlikely that most people will want to pay sufficient attention to their investments. For most of us, it is enough to know that we have stewards looking after our assets, ensuring we get value for money and that our assets are invested responsibly.
When acting responsibly, as happens in many occupational trusts, the trustees are known to members and respected as their representatives in everything from funding negotiations (even in DC) to the choices of investment managers and products.
Similarly, some IGCs have created forums for employers and employees and are liaising with their product provider (insurer of SIPP provider) on member’s behalf. IGCs and Trustees are our stewards and can – in time – become as trusted as DB trustees have been.
For stewards- whether IGCs or Trustees, to be trusted, they must be visible and they must engender trust through their actions. Sadly – too many of our stewards are not up to the mark, we need younger, more diverse and more enthusiastic stewards than we have today.
They need to be familiar with how member’s money is invested and act as our agents where we cannot act ourselves. This might include, for instance, exercising influence on managers in using voting rights and reporting on their activities through Chair Statements and IGC reports in a way that genuinely engages members in their pension funds.
Similarly, IGCs and Trustees should be the independent arbiters of the value for money that members are getting from the products they are offered by providers. Presenting the performance and costs of funds (for instance) in a meaningful way – allowing people to compare funds and platforms in a simple way, meets member needs. The DWP get this, their latest consultation on value for money specifically calls for value for money measures to be published online by occupational trustees. The FCA are expected to follow with instructions to IGCs.
In short, Trustees and IGCs could and should have a vital role in helping members to get to know their pension, but we are a very long way from this position at the moment.
The culture that allows the positions on IGCs and Trustee boards to be dished out as sinecures, must cease and instead we need new blood.
3. Digital engagement
Much has been made of the power of a single platform run by the Government which allows people to see all their pensions in one place. Over 100,000 people are reported to have requested the DWP to offer such a “pension dashboard”.
There is clearly demand for such a service, though the DWP are understandably reticent about committing to it. I have written at length about the rights and wrongs of who provides the dashboard, but fundamentally we need at least one – and probably multiple dashboards.
The advent of “open banking” has exposed the lack of digital innovation in pensions. People expect to see not just what they’ve got , but what it’s worth and even whether it’s any good.
Technology now allows us to set up secure systems to scrape data from a variety of sources to provide real time information to people looking to know what their pensions pots are worth and what to do with them.
The development of means – not just to show their money – but to enable people to do things with their money, is not far away.
This is particularly the case with older people. We hear this week that 40% of the over 65s now shop on line (four times up on 5 years ago). It is surprising that there is no pension aisle in the moneysupermarket, no way to Go Compare pensions.
If pensions are to be accessible through dashboards, the comparison sites – including Comparethemarket, would be a good place to start.
Instead of excluding pensions from the digital revolution, the pension industry and Government should be working with the digital comparison sites to bring pensions to the people.
This long blog has explored the three best ways to get pensions to the mass of us who don’t do pensions. In truth, even if we got all three ideas working properly, there would still be a majority of us who would not pay attention to our pension.
We should not rely on “engagement” as a panacea to under-investment in our futures. The tough truth is that to have more in retirement, we need to save more, and the engine room for saving is the nudge mechanism we call auto-enrolment.
Like it or not, nudge works. The various “nudge” ideas being touted about – such as the “sidecar”, depend to work on people not being engaged, but saving on auto-pilot.
For most of us, “engagement” will happen when people have got sufficient savings to make them worth engaging with. We need to make it easier for people – when they want to engage – to engage- but we should not try to coerce people into engaging with pensions if they see no need. Such people need to be nudged to save – they can engage later!