This is the second of a series of blogs on the pensions consumer journey which together form my response to the FCA/TPR call for input on a standard way of looking at pensions.
In this blog I look at the issues people have with decision making and their capacity to self-harm when they stray off the standard consumer journey.
1. What harms can people do themselves?
The CFI identifies the following harms that people can do themselves
- struggle to make decisions that optimise their pension saving
- remain in badly-performing products
- are susceptible to scams
and asks “Have we identified the correct overarching harms in the consumer journey? If not, what others are there?”
I agree that these are frequent ways that people can waste their retirement savings but they are not the only “harms”. Many people find themselves destitute in retirement through systemic harms which arise because many people cannot get to benefits and incentives to which they are entitled
The take up of pension credit is pitiful and many people are finding they are getting paid the wrong state pension (sometimes no state pension).
Many will die never having claimed what was theirs by right. A high proportion of low earners, though no choice of their own miss out on a savings incentive amounting to 25% of their pension savings because they are in a sup-optimal net pay scheme when they could be using a relief at source payment system.
It is wrong to say that this is out of negligence on these people’s parts, missing out on benefits is usually because benefits are so little understood, the problems with the state pension are because of the complexity of entitlements while the choice of the payment system is down to the employer and is a harm done to low-earners because employers themselves are unaware or unconcerned.
These harms are not exclusive to those on low earnings. Many people who are entitled to tax relief at higher marginal rates, fail to claim it because they are confused or unaware about the type of pension contribution they are making. The net pay tax system was designed to ensure that marginal relief was enjoyed at source and worked well for defined benefit schemes but when people who are used to net pay, find themselves in a relief at source pension , is it surprising that they are unaware that it is now up to them to make a claim for higher rate relief?
We are often told that the problem stems from a lack of financial awareness and that providing financial education to the public will make things better. But in an age of real-time information, isn’t the onus on Government to sort out who gets what and deliver benefits and incentives automatically?
Claiming benefits and incentives should not be the reward of those with high levels of financial awareness, that is how inequality is created and maintained. We need to use technology not just to empower the financially aware but to protect the financially vulnerable.
2. Do we understand why people do themselves harm with their pensions?
When considering these “harms, the CFI identifies a number of behavioural bias’ that could account for poor decision making. These include short-termism, risk aversion, and both a lack of or too much confidence in managing financial matters.
These bias’ are undeniable and they do lead to bad decision making. The CFI asks “have we identified the correct bias’ and are there others we should consider?”
We should be careful about assigning the problem to deficiencies in individuals. This risks absolving Government and governance from taking responsibility for matters which are proving too hard for individuals. This does not mean denying people choice, but it does mean ensuring that people have to opt-out of the desired pathway. “Desired pathways” assume Government and fiduciaries have a clear idea of what the strategic objective of a policy is.
The paper goes on to look at structural issues including, gender race , disability and the type of employment which impact on the level of financial resilience people have in retirement. But consideration of these societal factors needs to also think about the wider context of financial support (see above) and recognise that many groups in society have different support mechanisms in older age than is assumed by a financial model structured around individual self-sufficiency. These mechanisms may involve family or wider communities such as a church or mosque and for many people saving in the UK, the destination in retirement may be abroad, either returning to a homeland or to emigration.