Patrick Heath-Lay: Competition between pension providers should be based on the critical value delivered by pension products, not marketing tricks
Last week my attention was immediately drawn to a news alert from this publication that the ‘Industry calls for ban on pension switching incentives’.
To say that I wasn't surprised that the latest Pension Buzz survey showed that more than six in 10 of those working in the industry would support a ban on offering incentives on pension transfers would be an understatement of epic proportions.
Such practices have long been used by a number of companies to encourage people to transfer their pensions into another scheme, but it doesn't mean that it's the right thing to do. It's clear many agree.
We've long wondered how such incentives affected the consumers' decision-making process, particularly given the inherent weaknesses in that market and the lack of obligation on providers to protect consumers. This led us to commission the Behavioural Insights Team (BIT) to find out. The results of the research, which involved more than 5,500 pension savers, were very clear – incentives increase the likelihood of people ignoring the fine print and switching their pension to a worse option.
This is why we're calling for pension switching incentives to be banned. It's crystal clear that they inhibit people's likelihood of reading the small print – critical details that can make thousands of pounds of difference to a pension at retirement.
Each month, tens of thousands of people are being encouraged to transfer their defined contribution pensions but, as it stands, it is incredibly difficult for the average saver to compare what's on offer, even without an incentive being in place.
Research we conducted earlier this year, showed that more than seven in 10 UK adults who had transferred a DC pension in the previous two years were unable to say what the fees for their old pensions were or what they were being charged for their new one. Our analysis shows that an ill-informed pension transfer could cost people tens of thousands of pounds over their working life.
Value for money
We passionately believe that the pensions industry needs to provide simple, easy to understand information for members before they make the decision to transfer their hard-earned savings to a pension which many have no idea if it is offering them better value than the scheme that they are leaving.
When it comes to measuring value in pensions, the one true tangible measurement is how much the saver is charged. Together with the recent track record of that provider to provide a good return they can provide a net benefit outcome measure. This net benefit approach, as used widely in the Australian market, we believe, is the right approach to enable core value of a pension scheme to be compared in a consistent way.
We think that such a measure is one possible way of showing value for money to savers on a consistent basis. It could be a potential evolution of the Financial Conduct Authority (FCA), Department for Work and Pensions and The Pensions Regulator proposals for value for money metrics, covering the workplace pensions market.
We believe that value for money metrics should apply across all DC pensions including the retail pension market, which isn't subject to the 0.75% charge cap that workplace schemes work within. People can't be expected to understand the differences between retail and workplace, master trust or contract. To a consumer this is about their pension savings so if we are to enable them to transfer their pension wherever they like, we must also arm them with the information to enable them to compare defined contributions scheme across the entire market.
What we mustn't forget is that we are potentially two years away from pensions dashboards going live, which will eventually mean transferring and consolidating pensions will be even easier than it is today.
Protecting consumers
I know the FCA is working hard to introduce rules to try to protect consumers when commercial dashboards are licensed. However, my many years in this industry also tell me that there will be a number of people and organisations across the pensions market working equally as hard if not more so, to try to find a way through this regulation once it is finalised, to enable commercial dashboards to deliver new customers. After all they are called ‘commercial' dashboards for a reason.
We're all for healthy competition between pension providers, but this should be based on the critical value delivered by pension products, not marketing tricks that exploit flaws in the way people think or exploiting the vulnerability that individuals currently have in a pension transfer process. The BIT research was part of our ongoing drive to make the pension transfer process work much more in the favour of the consumer than providers, which, sadly, isn't the case right now. Our work at The People's Pension is focused on how we can improve this for our 6.7 million members.
The inescapable truth is that pension companies and the wider industry, whether they are offering incentives to switch or not, simply aren't doing enough to make pension transfers work in the favour of those who really matter – the savers.
Patrick Heath-Lay is chief executive of the People's Partnership, provider of The People's Pension
