The pensions industry needs to take a different approach to financial wellbeing if it is to help people better understand the challenges they’ll face as they age.
This was one of the key messages from a recent roundtable event run by Corporate Adviser, which concluded that consultants, advisers and providers should take a more ‘human-centric’ approach when it comes to developing the products and services that will help savers prepare for their ‘second 50’.
Gallagher’s head of wellbeing, Andreas Hunter, said the industry needs to adopt a more empathetic and forgiving approach.
“As an industry, we spend a lot of time effectively telling people off for not doing the things we have told them to do — and we’ve been doing this for 20 to 30 years. Albert Einstein said you cannot change a problem with the same thinking that got you there in the first place. Perhaps it’s time for the financial services industry to acknowledge this, and look at other solutions, rather than just keep telling people they need to save more into pensions.”
Many attending the debate agreed that a better understanding of human psychology was key, when looking at the challenges people face due to increased longevity.
Benefex’s head of workplace savings, Andrew Barradell, said that when it comes to better engagement with pensions, one major issue is the “present bias” that appears to be hardwired into many of us. “Most people’s focus is very much on the present, dealing with the financial concerns of the here and now, not looking 30 years further down the line.”
Aegon’s insight manager, Dr Thomas Mathar, who works at its Centre for Behavioural Research, said it could be helpful at times to take an even wider view. “Present bias is a classic behavioural term and can be a useful lens to apply. But this terminology also implies there is something wrong or irrational in this behaviour, something that needs to be overcome.”
He explained that with his background in anthropology, he wanted to understand where such behaviour originates from. “As humans, we’ve been walking around for about 300,000 years, but it was only 12,000 years ago we settled into communities, with money appearing just 4,000 years ago. Retirement meanwhile is a new phenomenon, as it’s only been around in the UK for about 150 years.
“This is obviously a very academic perspective, but this angle shows us this behaviour isn’t flawed or stupid or irrational. Our emotional and cognitive make-up hasn’t changed: we are not hardwired to think about longer-term planning, as for most of human history we haven’t had to.”
He said he hoped such insights would encourage a more empathetic approach from the industry to the financial challenges people now have to grapple with.
Longevity challenge
Secondsight managing director of employee benefits consulting, Gavin Zaprzala-Banks, said taking this longer-term view highlights other challenges people face today. “The concept of retirement was created around 150 years ago, but we’ve seen huge advances in medical technology since then, which is very much a factor in longevity.” He pointed out that this hasn’t been matched with advances in social and economic structures.
“We’re very much playing catch-up when it comes to recognising what the ‘second 50’, or ‘final 20’, years of life might require.”
Consultants at the event agreed that many people found it difficult to engage properly with these issues. Hymans Robertson client director of personal wealth, James Smith, pointed to research from Club Vita which found women tend to underestimate their life expectancy by eight years, men by four. “They coined the phrase ‘longevity pessimism’ to reflect this.”
Meanwhile, Marie Blood, a DC consultant with Barnett Waddingham, said that when people are asked what they expect to be doing in retirement, surveys show that ‘travel’ is the most popular answer. “Their thinking isn’t just conditioned by thousands of years; it’s also influenced by what they’ve seen from their parents’ generation, many of whom would have had DB pensions, which are not widely available to those in the workforce, at least in the private sector. They want to travel but they may not know how they will finance this.”
She adds that there is a focus on these more positive aspects. When people talk about retirement, they general don’t refer to health or mobility issues, declining mental capacity or the potential need for longer-term care, all of which are likely to be a factor in the later years of retirement, due to increased longevity.
Smith agrees many in the workforce struggle to think about the realities of retirement, and this impacts financial planning. “Recent research shows people are entering care earlier than they have ever done before, and we’re going to see a greater number of individuals in care by 2040.
“The majority will be women who haven’t saved enough. But it’s hard getting people to think about this. Most will say ‘I don’t think I will live that long’ and simply hit a metaphorical snooze button when it comes to talking about pensions or planning for retirement.”
Mathar says this very much reflects the fact that longer-term planning is a mental challenge as much as a financial one. “It is important to recognise the softer side of financial planning. It isn’t all about conveying information about how pensions work and why you need to budget.
Hunter said it was important to acknowledge people can feel anxious and overwhelmed when thinking about finances. “They often feel shame or regret and a host of emotions that can have very negative connotations. This should be reflected in how we talk to consumers. At the moment there is a mismatch.”
Mather pointed to research by Aegon that found people who felt empowered by their finances were twice as likely to download and utilise its pension app compared to those who felt anxious. The app is designed to be used by everyone he said, but using these emotional insights in communications strategies can help promote such services.“This is clearly a multifaceted issue,” he added. “There is the socio-economic lens, which recognises people from different backgrounds may have different needs and attitudes towards long-term saving. But it’s also important we recognise the emotional landscape that underpins this too.”
Regulation
Those attending the event discussed whether a changing regulatory framework could help facilitate a more ‘human-centric’ approach, with the majority supporting new Consumer Duty rules which prioritise delivering good outcomes.
“It is good to see there is a focus on real-world outcomes, not just hypothetical ones,” said Zaprzala-Banks. “And one of the key things that sits at the heart of this is that it’s about the whole person, not one transaction or a single exchange.”
Mathar said this differs from the previous ‘Treating Customers Fairly’ regime. This may have put the consumer at the centre of regulation, but he said the regulation still had a transactional focus. “It was about what the provider was delivering for the customer. The emphasis was on being compliant, not necessarily delivering good outcomes.”
But there were some concerns expressed about this new Consumer Duty regulation.
“One of the most important questions we can ask is why these regulations came about,” said Hunter. He pointed out that the stakeholder regime of the early 2000s was a response to the “rip-off pension charges” endemic in the 1990s, while the TCF rules recognised that many people were buying inappropriate products, even if these met the ‘product-focused’ regulations of the time.
He said that while regulators and policymakers are looking to improve outcomes with Consumer Duty rules, it may not have the desired effect. “There may be unintended consequences when it comes to the corporate market. Consumer Duty covers regulated firms but overlooks the fact that employers are the largest distributors of pension schemes in the UK. But employers are not regulated entities, and many are already worried about giving advice and crossing into regulated territory.
“If Consumer Duty moves down the scale of what you might need to do, or take into consideration when offering a financial product — be it through ‘targeted guidance’ or whatever they call it — it could cast a long shadow into what employers are comfortable about doing.” This may potentially result in less information or guidance given to the employees who need it most he said.
Advice, guidance and coaching
Hunter said, in his view, most people would ideally like financial advice, with personal recommendations on where they should be saving or investing their money. But the high cost of this, partly due to high professional indemnity costs, meant it was not remotely viable for the vast majority of people.
But not all on the panel shared this view. LCP head of financial wellbeing Heidi Allan said: “If we can improve financial literacy, most people would benefit from guidance or more targeted support, with only a relatively small number needing full financial advice.”
Smith agreed, saying he would like to see more of a focus on financial coaching. “This is a good way of creating a degree of accountability. That’s why we have personal trainers for the gym, for example: they offer support, but it’s also about checking in each fortnight, measuring progress towards your goals.”
Financial coaches take a more holistic ‘whole-of-life’ approach, he said, pointing out his own personal experience of this, where his main takeaway from one session was the need to have a more honest conversation with his partner about where they wanted to buy before running calculations on mortgage affordability.
Allan said that coaching can also help people appreciate the value of full advice — and they may be more willing to pay and better placed to source this help should they need it at a later stage. “I’d like to see more mid-life financial coaching, perhaps delivered through the workplace. We have mid-life health check-ups; this is just as important, and often related.”
Many on the panel were optimistic that the current advice/guidance boundary review would enable more targeted guidance services, which could help deliver such services cost-effectively and at scale — aided by the rapid development of new technology and AI services. Aegon pointed out it already offers a range of services through its workplace proposition, including financial education through its Pensions Geeks webinars, its telephony-based Aegon Assist guidance service and full advice through Origen.
Overall the panel agrees that improved regulation, better tech, and a broader understanding of how psychology drives a range of behaviours can should help facilitate more meaningful financial planning that supports people as they negotiate today’s longer, multi-career and multi-phase lives.