To trust the free markets with our pensions, we need to know what we’re talking about
Do you know how much is in your pension? And how much will need to be in there to give you the retirement? I’m prepared to bet that even some of the super-savvy readers of CityA.M. might answer “no” to at least one of those.
If so, you’d be in good company. Most people don’t know enough about their pensions. As well as being a large – and growing – problem for public policy, that tells us some interesting things about markets and human nature.
At the Social Market Foundation, we’ve been investigating the information people have about pensions. Working with Phoenix Group and pollsters at Opinium, we asked thousands of people in their 50s and early 60s how they feel about pensions, what they know about the subject, and where they get information from.
The key takeaway is that a system that’s supposed to provide them with good, reliable information on pensions isn’t working. The majority of people approaching retirement get neither formal financial “advice” from a regulated advisor, nor “guidance” from the government-backed Pension Wise service.
That service was created after George Osborne’s “pension freedom” reforms ended the requirement for people retiring to buy an annuity. This is where markets and human nature come into this story.
Pension freedoms are a decision to use market mechanisms to provide private pensions: it’s left up to us all as consumers to decide how many of our pounds to allocate to pension saving while we’re working, then to decide how to use our pension funds when we retire.
Markets can be wonderful, because people left to make their own decisions often make great choices. But not always. Good choices need good information, and too many people are in the dark about their pensions.
Less than a third of people aged 50 to 64 had an accurate idea of how much they need to save in order to support the retirement lifestyle they want. And the vast majority err on the low side: humans have an optimism bias that pushes us to think things are better than they really are.
The result of poor information among working-age people is under-saving. People approaching retirement are typically almost £250,000 short of the pension pot they’ll need to support the lifestyle they hope for in retirement.
The result of poor information about people retiring is poor spending and investment choices. Should people hitting retirement age splash out on a new car or kitchen, or keep their pension cash to cover living expenses? Pension freedom is still a young policy, so the evidence is still coming in. But lots of people were uncertain and worried about these choices. And we know from research elsewhere that for all our optimism bias, people generally underestimate how long they will live. That means their pension pot could run out before they pass on.
How to fix this? Some tweaks to policy and regulation would help a lot. Pension Wise should be turbo-charged with tech, to offer “robo guidance”, given a broader scope and opened up to anyone over 40. Financial Conduct Authority rules on who can – and cannot – provide “advice” and “guidance” should be clarified: over-strict interpretations are stopping charities and companies alike from providing people with useful information. People retiring should be “nudged” more firmly to get help.
And finally, a national conversation about pensions must begin. As final salary schemes fade away, more and more people will be in the market, making their own choices on saving and spending pension cash. For that market to work well, the people in it need better information.