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Nudging members toward better retirement choices

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The Financial Conduct Authority (FCA) has released a consultation titled ‘The stronger nudge to pensions guidance’. Its aim is to create an environment where consumers are encouraged to take the right guidance at the right time to support them to make informed decisions.

Supporting members with appropriate levels of guidance and advice is valuable. I was recently quoted suggesting trustees should identify a preferred IFA at point of retirement or on a transfer request. This is because I believe a specialist adviser can provide quality education to help the member understand whether they should be considering a transfer or not. Not everyone agreed with me!

In a follow-up article, a chartered financial planner was quoted suggesting this would limit member access to only larger advice firms because smaller firms wouldn’t be able to cope with the volume of work. I don’t think this is a valid criticism. The size and variety of the pensions market would ensure there’s no monopolisation in the advice market. Trustees are likely to be in a better position than members to review IFA firms, ensure solid compliance and negotiate better terms.
The Pensions Regulator (TPR) and FCA released a guide in March 2021 outlining how employers and trustees can support members with financial matters. It’s a worthwhile read as it clearly demarcates the line beyond which trustees wouldn’t want to stray without being subject to additional regulation around giving advice. There’s a variety of signposting, information and education trustees can provide, which would be valuable to a member making decisions vital to their financial wellbeing.
However, providing members access to this information and education and possibly independent financial advice is just part of the picture. The far more vital question is how to embed this within the member journey, with critical nudges along the way.
Financial planning by members is often a haphazard and serendipitous journey which evolves, rather than a planned series of educated decisions. It’s important for sponsors and trustees to investigate whether their members have key information available and easy choices at important junctures: joining the scheme, critical life triggers and significant birthdays, for example. The digital world makes it easy and cost-effective to send email reminders and invitations to click through a link and view contextual information which supports better decisions on the internet.
Nudging members over a lifetime builds engagement with the pension scheme, appreciation of a valuable benefit, visibility of available resources, better understanding of options and a long-term trusted relationship. Leaving a member to their own devices on the other hand places them at risk of scams via inbound telephone calls, email phishing expeditions and even in the pub. If members are left to their own devices without trustee support, they may build a relationship with a questionable advisor and have expectations that are very difficult to dislodge.
With DB pension arrangements, the options are fewer and the risks sizeable. We know even the few open DB arrangements don’t get 100% take-up. The biggest concern is at exit and it’s important to ensure the small number of members for whom transferring out is a valuable option understand this is possible. On the other hand, it’s useful for the rest of the membership to value their arrangement and not fall prey to scams.

Members of DC arrangements have far more to think about. Should they opt out of a scheme in which they’ve been auto enrolled? What matching does the employer offer, and should they level up? Are they in the right funds? Should they transfer and consolidate when they change jobs and is the AMC value-for-money? At what point do they begin their decumulation journey? How do they balance their income across their state pension, inheritance, other savings and potentially multiple DB and DC schemes?
A member’s holistic financial arrangements can often be worth quite a lot. Not always large enough for an independent financial adviser to get excited about, but more than enough for a financial scammer.
The government is keen to support members and the FCA’s current consultation is geared toward nudging members toward guidance via the Money and Pension Service.
Whichever way one looks at it, these nudges need to be built into a larger framework of information, education and guidance if sponsors and trustees are to support their members to make the best financial decisions for themselves and their families.
Girish Menezes, Board Director, PASA