I’m returning to the questions put to us by the Work and Pensions Select Committee. The call for evidence has closed but the questions remain just as relevant.
One question , chair Stephen Timms is putting to us is
Including costs, what information do consumers need about different retirement products to make an informed choice?
It’s an odd way to ask the question, almost embedding the answer “give us the costs”. Knowing that the cost of a bottle of wine is £8 , doesn’t tell us much (except that the shop thinks people will buy at the price). Showing that the wine can be purchased at £6 round the corner but at £20 in the local restaurant asks the question, if the wine is the same, are we prepared to pay a premium for the context.
But if you don’t know that these other prices are available, are you able to make an informed choice about the wine?
If you discover, after paying for the wine, that you overpaid by £2 for the same purchasing experience, you may consider you didn’t get value for money. But you will also be aware that you didn’t shop around (or even consult your smartphone). You may feel you have only yourself to blame and I think you’d be right. It’s a pretty simple decision, the wine is the same wherever you buy it, you have an informed choice and if you didn’t take one, too bad for you.
But in financial services, what you are buying isn’t the same in every bottle. Looking at the MoneyHelper pension site (still in beta but available from this link), it looks like MaPS is backing down from getting people to compare post retirement investment vehicles solely by price. This is just as well, we have looked into some of these products and discovered that people are not comparing the same bottle of wine on price, they are comparing a bottle of plonk and a premier cru claret on price – as if the wine in the bottle was of the same quality. This was not an informed choice for consumers and a clear example of where value for money rather than money is a better measure.
Another way of buying wine is by consulting an expert and a lot of people consult Robert Parker for his wine ratings. The scale, ranks wine on a scale from 50 to 100 points based upon the wine’s color and appearance, aroma and bouquet, flavor and finish, and overall quality level or potential.
Parker’s rankings influence price as people will pay more for a high ranking wine. We now have a number of ways of measuring the cost of pension products ranging from a mono-priced AMC to a total cost of ownership, a monetary cost as well as full disclosure of charges on an unbundled basis.
But pensions do not have a Robert Parker to rate the pensions we purchase, we don’t have any way of knowing what is in the bottle and have to assume that all pensions are the same. This is a hangover from the days when pensions were guaranteed and the qualitative aspects of the purchase were unimportant (does anyone really think that an annuity provider will fail?).
But investment products are very different, they drive member outcomes and measuring those outcomes is very easy. It is easy to compare an achieved outcome against the average outcome by using a benchmark fund, which produces an average outcome. We may not get to the sophistication of a Robert Parker, but we can give people information on the outcomes of the products we are purchasing.
It is a mystery to me why pension product managers aren’t prepared to allow their products to be road-tested or wine-tasted. Can there be any other consumer product that is so inadequately displayed, as a pension product?
For far too long , pension funds have allowed their fund managers to be rewarded on an ad valorem basis (this means that the more money they make for their investors, the more they can take out of the member’s pot). But while they benefit from out-performance, they are not punished for under-performance, because poor performance is not communicated to those who are paying the fund managers – the consumers.
So we have the ludicrous position of having consumers buying blind, not just when they buy the product, but repurchasing the product year after year – without any information to take that decision. In reality, investment purchasing decisions are hardly ever reviewed by consumers , which is why DC pensions are considered “sticky” by fund managers – “sticky” relies on consumers being kept in the dark.
Can consumers take informed choices on retirement products?
Clearly there is a lot of informed decision making among those who purchase an annuity. My friends at Retirement Line tell me that people who approach this annuity broker, engage in the decision.
I know that people who use financial advisers are generally comforted by the decisions they are taking.
But I am not satisfied that the vast majority of the people who are taking life-changing financial decisions at the time of retirement are not taking informed decisions and are making choices which are at best sub-optimal and at worst catastrophic.
And the reason for this is that we have failed to come up with a coherent system of guidance which gets most people into a choice which is broadly optimal. I partly agree with Ian Costain in a comment made on a recent blog
in October 2018 the FCA and TPR launched their joint regulatory strategy. The press release mentioned the ways in which the FCA and TPR would work together going forward including two new priority areas for joint action, the first of which was “a strategic review of the entire consumer pensions journey – taking an in-depth look at what tools are needed to enable people to make considered decisions about their pensions”. Two-and-a-half years to publish a Call for Input!?! Lucky I suppose that it was a deemed to be a priority area. Otherwise Yeovil Town might have been back in the Football League before it was published.
Secondly, in the meantime hundreds of thousands of consumers have been taking at-retirement decisions on a non-advised basis. In order to reduce the risk of consumer detriment, the FCA pressed ahead with Investment Pathways (consulted on them twice, published a policy statement, and implemented them in February 2021). Diddly-squat from TPR. What happened to the “joint action” trailed in the launch of the FCA/TPR strategy in 2018? Why is the consumer protection provided by the FCA’s Investment Pathways not afforded to customers who are in trust-based schemes?
The FCA and TPR have not been helped by bodies such as the PLSA and ABI who cannot agree that a member of a DC occupational scheme, is for the choices taken at retirement, the same as a policyholder in a GPP of GSIPP.
But nobody is taking the more important and courageous decision to create a standard option that suits most people, an option not to take a decision but to trust that for most people, the conversion of the pot into a collective scheme pension is the right decision.
I did however have a conversation on Friday with a senior executive of one of our retirement insurers that gave me hope that there may be leaders emerging, not – like me- at the end of their careers, but on the upslope to their career’s zenith. I hope to be able to speak more about this conversation but in summary , we concluded that most members cannot take informed choices on retirement product and would be better having that choice made for them.