Head of Policy, Pensions & Investments.
Head of Policy, Pensions & Investments.
The Government is currently consulting on a new ‘Framework of Metrics, Standards and Disclosures’ applying to all Defined Contribution (DC) pension schemes and products. It hopes that its proposed new framework will improve value for money. The first iteration of the new framework is aimed at pensions professionals who oversee the running of workplace pensions, with a later iteration expected to refine that framework to support scheme members more directly and those who hold non-workplace pensions, including SIPPs.
At Scottish Widows, we wanted to understand how scheme members perceive and evaluate value for money. Therefore, we commissioned extensive research in 2022, covering 2,000 members of both workplace pension schemes and non-workplace pensions, 50% of whom were members of an arrangement managed by Scottish Widows.
Those surveyed found it easier to contextualise value for money in relation to other products and services that they used in their daily lives than they did for pensions. They placed value on things like convenience, additional benefits such as club cards and reward points, price, customer reviews, and customer service – especially when things went wrong.
None of this is particularly helpful in truly evaluating a pension product or scheme, where the ultimate value is the size of the pension pot which will be available to people when they eventually decide to retire.
To truly evaluate and appreciate the potential value of one pension scheme relative to another requires a comprehension not only of concepts such as percentages and compound growth, but also concepts such as volatility, market timing risk and longevity. Our research showed that this knowledge gap contributed to the lack of engagement with pensions and an inability at this point to properly assess value for money.
Other contributing factors included a trust that members’ employers will have put in place a good pension scheme, as well as a misperception that the money in their pension pot isn’t actually theirs until they retire.
We can’t aim to turn everyone into an actuary or investment professional, and so we wanted to understand what we could do that would be effective in closing this ‘engagement gap’, where our efforts would have the greatest impact and whether different approaches might be more effective with different demographics.
Building on previous research we carried out, we firstly considered scheme members as being either ‘maximisers’ or ‘satisfiers’. The maximisers wanted the best, they tended to be financially savvy, they shopped around, but they also tended to have a bias towards the short term. The satisfiers tended to be time poor, stuck in their ways and less focused on their finances – they would tend to be happy with something that was good enough.
To drive engagement with the maximisers, we need to illustrate the value of our products and services in an intuitive way. The later, consumer phase of the government’s ‘Metrics, Standards and Disclosure’s Framework’ should be of greatest benefit to this group. To drive engagement with the satisfiers, we need to start with quick and easy financial tools which recognise shorter attention spans. The challenge here is to eventually trigger sufficient interest from the satisfiers to turn them into maximisers one day.
In conducting our research, we also tested the level of interest that each participant had in their pensions and also their level of understanding. This gave us a model that allowed us to predict where our efforts, and those of the government and the industry could have the greatest impact.
There is an argument that most of our effort should be directed to where we can make the biggest difference. This means communications which don’t assume a great deal of pensions knowledge but look to build that knowledge over time, along with broader initiatives, perhaps in conjunction with the government and the wider industry, to move more people from disengaged with a low understanding to highly engaged with a high understanding over time.