People’s Partnership is calling for a ban on pension-switching incentives due to their tendency to prevent pension holders from reading the small print.
According to new research from People’s Partnership, cash incentives make pension holders overlook the small print and switch to a worse pension option.
Over 5,500 UK pension holders were polled as part of the study, which was carried out in partnership with the Behavioural Insights Team (BIT) to determine how they would respond to transfer invitations.
Researchers found that respondents were 20 per cent more likely to move their pension when they saw a £100 payback offer, even though the new pension may cost them more than £1,000 in fees over five years.
Furthermore, those who received cash incentives were 20 per cent less likely to carefully review the details of the offer, making it impossible for them to fully consider the ramifications.
People’s Partnership CEO Patrick Heath-Lay says: “This research shows cash incentives bias the pension transfer process in ways that are often harmful as they act as a barrier against people considering what is on offer and whether it is value for money. They are also less likely to read and understand basic details about their new pension, even when these are prominent, and they stand to lose money.
“Healthy competition between pension providers should be based on the quality of pension products, not marketing tricks that exploit flaws in the way people think. We believe this research highlights practices that are contrary to the FCA’s Consumer Duty.
“This new research from BIT further underlines how vulnerable people are when transferring their pensions without advice. It is clear consumers don’t understand the key elements of value within a pension and the industry clearly isn’t doing enough to make the transfer process transparent and comparable.
“We support moves by government and regulators to make value for money in pensions more transparent and comparable to the consumer. As it stands, the transfer market is too stacked in favour of pension providers, rather than in the interests of the consumer. This urgently needs to change.”
BIT UK head of financial behaviour Ruth Persian says: “Pensions are complex and often confusing. Our experiment shows that ads promoting incentives, such as free cash offers, for transferring pensions can lead pension savers to ignore costs and other important information, and choose poor value products. As a result, pension savers could lose out on tens of thousands of pounds in retirement. This shows the importance of taking into account consumers’ behavioural biases in the sale of financial products and their marketing – something the FCA Consumer Duty now requires financial services to do.”