The sordid side of nudge.

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Go, go, go, said the bird: human kind
Cannot bear very much reality.   (TS Eliot – four quartets)

There is a thin dividing line between nudge and dishonesty. Nudge  flirts with transparency but never consummates.

We are nudging millions of savers into retirement, but we are telling them very little about how much they are saving, what they are investing into and what the options are ahead of them. For now, it is enough that they are saving.

Some have gone further and anticipated questions that never came , heading those questions off at the pass with acceptable answers. NEST’s “Foundation Stage”. NEST have deliberately sacrificed the growth opportunity for young savers for reduced investment volatility, anticipating questions such as “why has my investment gone down” by ensuring that it never does.

This is a mis-reading of behaviour, very few young people ever ask the question and those that do are sophisticated to understand that long term investments such as shares fall as well as rise in value. In shielding investors from that reality, NEST stands accused of costing them the opportunity of greater growth.

Nobody would accuse NEST of dishonesty, but maybe they have been economical with the truth.

I was minded of NEST’s Foundation Stage, as NEST’s CIO- Mark Fawcett was a speaker at an FT DC event yesterday morning. He spoke on responsible investing – a subject that is much more interesting to young people than whether their investments are going down or up. NEST are taking a lead on this and that is good. I do wish that we can move on from definitions and concerns about “conflation”, responsible investment is very much simpler than these arguments suggest.

I suspect that speaking simply, in the manner of a Warren Buffett , isn’t something that comes naturally to CIO’s maybe they should be nudged into it! The discussion on responsible investment needs to move towards reality, tough as that is!

Transparency is about exposing reality and reality can hurt

I couldn’t stay for the whole morning , but I did hear some interesting debate on transparency, not least about cost disclosure. I heard it said more than once that fully disclosing the cost of ownership of a workplace pension, risked driving unsophisticated savers away. It risked a higher opt-out.

This is precisely what NEST were saying about investment volatility and I would say precisely the same thing to those who think cost disclosure scares the horses. Most people don’t care, and those who do – are in a position to act in a much more positive way than stopping saving, they may choose to move investments to an efficient place, if they see their investments mis-managed.  This kind of reality is hard for efficient pension providers.

What is most difficult about the positions of those arguing against full cost disclosure (along MIFID lines) is that they are also arguing against the charge cap. There is considerable evidence of what happens when part of the market has a charge cap and part doesn’t. The evidence is staring us in the face.

The expensive fund managers leave the “capped” market (workplace pensions) and operate in the uncapped market (SIPPs and especially SIPP drawdown). It is quite ludicrous that investors move from an average cost of ownership of 0.50% (workplace) , to 1.5% (SIPP) simply because they are moving into drawdown. The reality is that the spending vehicle should not be costing them any more than the savings vehicle.

This blunt reality is not being talked about because the asset management is petrified of post retirement investment plans being subject to a charge cap, in the same way as pre-retirement plans. All the evidence suggests that where a cap exist, charges fall below the cap and expensive asset managers have to work harder for less reward. That – being honest – is what transparency does. Reality can hurt.

Value for money transparency

Another discussion at this conference was about value for money. It is generally held that we cannot pin down “value for money” so we might as well carry on as we have been for the past five years and bluster.

We are about to enter the fourth iteration of IGC reports where I expect to see more bluster and precious little transparency. Julius Pursaill nobly put forward the AgeWage solution to pinning down VFM as a panellist at the aforementioned FT conference.

To remind people, the AgeWage score tells people what value they’ve got for their money by comparing the rate of return on their unique contribution history against what the average saver would have received.

I am usually confronted by looks of incredulity from consultants, advisors, fund managers and platform providers when I put forward this way of doing things. What of course it does, is tell people – retrospectively both good and bad news.

“Humankind cannot bear very much reality”, was Eliot’s cocky assertion. He was being ironic. The poem from which this line comes does not duck reality, it asks us to confront home truths.

If we are serious about value for money disclosures, we must accept that some of the disclosures will make awkward reading, that is not a reason for not disclosing.

The sordid side of nudge

Nudging people into good behaviours is one thing, but letting people sleep-walk into bad behaviours is another. The somnambulism that surrounds people entering auto-enrolment has to be cured at some stage (see Roy Cropper).

What AgeWage scores – what VFM disclosures – are doing , is waking people up to the harsh realities of life after work. The chief reality is a cliff-edge drop in salary, not always to zero, but usually market. The second reality is that the retirement pot built up through workplace saving does not provide an age wage, but a sense of false security much more dangerous than we like to imagine.

Having retirement savings of £30,000 is not the same as having a pension of £30,000. Paying yourself a retirement income of 10% from your savings is not awarding yourself a wage for life. Paying the financial services industry up to 3% of your savings per year means that you are paying them over half the agewage you should be paying yourself.

These are the harsh, awkward messages that we need to be giving people who are in their forties, fifties and sixties. There is no escaping reality, no nudge that allows it to be put off forever.  At some point the nudging must stop and straight talking begin.

The sordid side of nudge is that it allows bad practice to persist, justified by the general dictum “don’t scare the horses”. The charge cap is necessary to protect people from the venal practices of the financial services industry who know that they can get away with just about anything under nudge!

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If you want a world where people are told the truth – no matter how hard it is to hear- then you can help. Invest in AgeWage and help us deliver transparency into a very opaque world.


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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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