What’s driving pension apathy?

The big suc­cess sto­ry of pen­sion sav­ings in the UK is auto-enrol­ment. Insights from behav­iour­al eco­nom­ics were used to cre­ate the scheme in 2012 to “nudge” more peo­ple into sav­ing a per­cent­age of their income in work­place pen­sion schemes.

Employ­ees can choose to opt out of the pen­sion scheme, but giv­en that many are not aware of the fact that they’re sav­ing into a pen­sion auto­mat­i­cal­ly, opt-out rates have been very low.

The scheme’s suc­cess is down to the pow­er of iner­tia. But the flip­side of iner­tia is that employ­ees hard­ly engage with their pen­sion sav­ings. Indeed, only a third of work­ers realise work­place pen­sion schemes are invest­ed in the stock mar­ket, accord­ing to recent research from Har­g­reaves Lans­down.

Many don’t realise they can active­ly change what their pen­sion is invest­ed in. Does this lev­el of apa­thy and lack of under­stand­ing pen­sions hin­der or help pen­sion providers?

Do pension providers win from customer apathy?

“Pen­sion providers do not encour­age their cus­tomers to decide to switch to oth­er funds and there seems an in-built assump­tion that peo­ple are not inter­est­ed and will not both­er to make active deci­sions,” says for­mer pen­sions min­is­ter Baroness Ros Alt­mann.

She notes that the more tra­di­tion­al final salary pen­sions did not typ­i­cal­ly per­mit mem­bers to choose their invest­ments and the trustees are respon­si­ble for all such deci­sions, which again means pen­sion savers nev­er need­ed to engage with invest­ment deci­sions.

“This lack of engage­ment can be ben­e­fi­cial to pen­sion providers, because they do not face tough scruti­ny from cus­tomers,” says Lady Alt­mann. “The com­plex­i­ty of prod­ucts and lack of trans­paren­cy have often allowed a pro­lif­er­a­tion of high hid­den charges, which were not in the member’s inter­est.”

The pros and cons of default funds

Most work­place pen­sion schemes will invest employ­ees auto­mat­i­cal­ly into the scheme default fund, explains Vic­to­ria Rut­land, char­tered finan­cial plan­ner at EQ Investors. Typ­i­cal­ly, this means that dur­ing the ear­ly stages of a person’s pen­sion sav­ings, the fund heav­i­ly invests in equi­ties and then pro­ceeds to move into low­er-risk assets such as bonds or cash, as peo­ple approach retire­ment.

How­ev­er, as Rut­land points out, for most of our work­ing life, our pen­sion is pre­dom­i­nant­ly invest­ed in equi­ties, which means it can fluc­tu­ate sig­nif­i­cant­ly. “Many peo­ple would be shocked to see how much the val­ue of their pen­sion has fluc­tu­at­ed in the last six months in par­tic­u­lar,” she says. You could there­fore argue that people’s apa­thy towards their pen­sion pro­tects them from pan­ick­ing about their sav­ings when the stock mar­ket fluc­tu­ates.

Why do providers offer this type of default strat­e­gy? Rut­land says: “Because it’s cost effec­tive. Putting every­one into this type of strat­e­gy means that every­one can invest in the same way as oth­ers who are the same age as them. Each provider can sim­ply make changes to one port­fo­lio. The cost of pro­vid­ing advice to every sin­gle investor in each group scheme would be pro­hib­i­tive.”

A more ethical way to invest your pension

But as more peo­ple endeav­our to live sus­tain­ably, atten­tion might turn to the actu­al con­tents of their pen­sion pot. In Aus­tralia, Dr Bron­wyn King, an oncol­o­gist, famous­ly per­suad­ed Aus­tralian pen­sion funds to divest from tobac­co.

“The major­i­ty of default funds, includ­ing lifestyle strate­gies, will be invest­ed in ‘tra­di­tion­al’ invest­ments such as shares in oil and gas com­pa­nies, tobac­co and arma­ments,” says Rut­land. “Tra­di­tion­al invest­ments don’t usu­al­ly con­sid­er the car­bon foot­print of the under­ly­ing com­pa­nies or the gov­er­nance of the busi­ness and its sup­ply chain.

“While a lot of oppor­tu­ni­ties to invest in eth­i­cal, ESG [envi­ron­men­tal, social and gov­er­nance] or pos­i­tive impact port­fo­lios are becom­ing more and more avail­able on the wider mar­ket, work­place pen­sions are behind the curve.”

With increas­ing aware­ness, the tables could turn if peo­ple begin to take more con­trol of their pen­sion, chang­ing funds en masse. In the UK, cam­paigns like Make My Mon­ey Mat­ter by Com­ic Relief’s Richard Cur­tis, could con­tribute to bring­ing ESG invest­ing to a main­stream audi­ence by ask­ing what is your pen­sion invest­ed in? But any form of pen­sion activism has to be bal­anced with people’s need for finan­cial lit­er­a­cy and advice.

Striking a balance between apathy and activism

How can the indus­try find a hap­py bal­ance between apa­thy and activist invest­ing? Kate Smith, head of pen­sions at Aegon, says: “Nowa­days, indi­vid­u­als have to shoul­der much more respon­si­bil­i­ty for fund­ing their retire­ment than ever before, so get­ting peo­ple prop­er­ly engaged as ear­ly as pos­si­ble in their work­ing life is key.

“We want to see more savers engaged with their pen­sions, includ­ing review­ing their invest­ment choic­es and mon­i­tor­ing invest­ment per­for­mance. This is a good thing for providers and savers. Cur­rent­ly, few­er than one in five UK work­ers say they have used an invest­ment-risk tool to find out how much risk they are com­fort­able with when invest­ing in their pen­sion.”

She notes that while many providers allow savers to car­ry out online fund switch­es, free of charge, few savers take advan­tage of this. The major­i­ty remain invest­ed in the default fund, out of choice or apa­thy. “In real­i­ty, we think it’s high­ly unlike­ly that savers will en masse make numer­ous invest­ment fund switch­es,” Smith adds. “And doing so will not nec­es­sar­i­ly lead to good mem­ber out­comes.”

For now, apa­thy and a lack of trans­paren­cy are still endem­ic in pen­sions, despite years of attempts to improve engage­ment. As Lady Alt­mann con­cludes: “Improve­ments have been achieved, but only very slow­ly. I believe the indus­try should face up to this chal­lenge and help its cus­tomers under­stand and engage with pen­sions.”

Driving engagement

Nest was set up by the gov­ern­ment to ensure every UK employ­er could offer a work­place pen­sion to their employ­ees when auto-enrol­ment was intro­duced. It now has more than 9.3 mil­lion mem­bers and one in three of the work­ing pop­u­la­tion is expect­ed to have a Nest retire­ment pot by the late-2020s.

“Our view is that engage­ment is a nec­es­sary tool in help­ing our mem­bers achieve bet­ter out­comes in retire­ment,” says Eve Read, Nest’s direc­tor of busi­ness deliv­ery. She argues that a com­bi­na­tion of efforts is required. “We issue reg­u­lar com­mu­ni­ca­tions on top­ics that mat­ter to mem­bers, which will be per­son­alised to their own sit­u­a­tion as much as pos­si­ble,” Read says.

“For some indi­vid­u­als, the way to cre­ate engage­ment is to make it real for them, such as shar­ing how Nest is com­mit­ted to tack­ling cli­mate change, but for oth­ers it might be high­light­ing that they could build their pen­sion pot faster by max­imis­ing tax sav­ings or employ­er-matched con­tri­bu­tions.” She says greater engage­ment could help pen­sion schemes gain insights such as their mem­bers’ desired retire­ment age or retire­ment income.

“How­ev­er, the biggest chal­lenge of a very active mod­el would be that mem­bers may then engage in high­ly com­plex deci­sions with­out ful­ly under­stand­ing the pro­found impact these might have on their finan­cial future. So, when we com­mu­ni­cate with our mem­bers, we have to think real­ly care­ful­ly about what we want them to think, feel and do, so we don’t inad­ver­tent­ly dri­ve behav­iours that might under­mine their long-term goals,” Read con­cludes.

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