Industry urged to adopt ‘meaningful transparency’ on pensions

Our new research identifies pension knowledge gaps and makes some practical recommendations, too.

• Frustration amongst consumers that information such as asset class, sector, geography, sustainability and exit fees could not be located easily
• Over a fifth (22%) of 18 to 34-year olds are in low risk pension options, potentially harming the growth prospects of their pension
• Almost half (48%) don’t know and couldn’t guess how much they pay to their provider in charges either as a percentage or in pounds and pence
• Nearly a third (32%) of life company members don’t know whether their pension is invested in funds that automatically become less risky as they get older

 A pension is often the biggest asset that a person will have in their lifetime. Yet research suggests that swathes of people in schemes from some of the UK’s best-known life companies lack key information to help them plan for their future.

interactive investor, the UK’s second largest DIY investment platform, today publishes a research report, ‘Show Me My Money’, which sets out some of the knowledge gaps, and makes some practical recommendations, too. 

Commissioning quantitative research amongst 1,000 UK adults from research company Opinium, and qualitative research from a Boring Money consumer panel, the report calls on the industry, policymakers and regulators to adopt an approach of “meaningful transparency” in pensions communications. 

Richard Wilson, CEO, interactive investor, said: “In any other industry it would be unthinkable for customers to be given so little idea about what they are buying, and how much it costs. And yet thousands of people are taking their retirement journey in the dark – and that means an uncertain retirement destination. 

“Now more than ever people need to put their financial affairs in order after a truly terrible year. Let’s help them. We call on the industry, the Government and regulators to mandate meaningful transparency from the life companies, both in terms of where and how pensions are being invested, and how much they cost. It’s not a big ask – but it is long overdue.” 

Charges and transparency

Nearly half (48%) of Opinium respondents could not guess the amount they pay each year to their pension providers into their pension pots in charges. The Boring Money consumer panel research found that generally, people were aware that they paid some kind of fee but did not know what this fee was. 

A few pension companies still charge exit fees, even if it is no longer common across most of the major life companies. Boring Money also set their panel the challenge of finding information on potential exit fees – and they couldn’t find them. Information on ethical investing also proved elusive amongst Boring Money’s consumer panel, echoing the interactive investor Great British Retirement Survey, which found that over half of respondents had no idea if their pension was being invested ethically.

Becky O’Connor, Head of Pensions and Savings for interactive investor, said: “In any other context it would be considered totally wrong for people not to know what they are paying for something – particularly something that is so valuable and can be so costly.

“Pension providers should assume that customers are interested in both the cost of their pension and what it is invested in as a starting point. 

“People can’t make good decisions without information. At the moment, the barrier is that people don’t know what they don’t know. Once they do know the basics, like their pension is invested in funds, which invest in companies, or that the fee they are paying is higher than average, that information becomes something they can do something with. But we need more ‘meaningful transparency’ of information that people can understand and use to take action if necessary.”

Slipping off the ‘glidepath’

Sometimes called the ‘pensions glidepath’, or ‘de-risking’, nearly a third (32%) of the Opinium sample don’t know or can’t remember whether their pension is invested in funds that automatically become less risky as they get older. 

Interestingly, younger people are more likely to be aware of this ‘de-risking’, with more than half (54%) of 18 to 34-year olds knowing their pension is invested in funds that are de-risked, compared to only 23% of those aged 55 and over. 

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “It is concerning that so many people have no idea if they are being de-risked in the run up to retirement. Retirement is no longer a cliff edge - pension freedoms mean fewer of us are buying annuities (only 20% of retired people have an annuity, according to our 2020 Great British Retirement Survey). So, our money needs to work harder for longer. 

“This year has been one of those years when a lifestyled approach may have given many people comfort. But people need to know what is happening with their risk over time and a box ticked decades ago, without much thought, could come home to roost for people in an unpleasant way. People who optimistically selected 55 as a retirement age years ago might find that they are starting to get taken out of equities ahead of their time – in their mid-forties. More broadly, some 17% don’t recall any changes to their pensions ever being communicated to them – whether that’s because it wasn’t, or because they have not read the information or forgotten, we can’t tell – but it is concerning.”

The good news

It certainly wasn’t all bad news. People are engaged enough to know roughly how much money is in their pension and what they pay in, with only 5% of Opinium respondents unsure how much they contribute to their pension. The average monthly contribution was £249 (£262 a month for men and £224 a month for women). 

Only 15% of respondents didn’t know the risk level of their pension, according to Opinium, with over half (52%) of under 65-year olds have a moderate risk pension. 

We need to talk about risk

Some 27% of people say they are in a low risk pension. More men than women say they have a low risk pension (30% versus 22%), but women were twice as likely than men to say they don’t know their risk profile (22% versus 11%). 

Worryingly, even amongst the younger generations (18-34 year olds), over a fifth (22%) said they had a low risk pension, and over a quarter (26%) of 35-54 year olds said they have a low risk pension. 

Given the long-time horizon involved in retirement planning, and given younger generations have more time to let the highs and lows of the stock market play out, this is worrying as taking too little risk could impact on their retirement goals.

Boring Money’s Qualitative research amongst their consumer panel found that when looking at their account or documents, some were confused by the SRRI (Synthetic Risk and Reward Indicator). However, risk levels were often guessed from the fund name or already known, and so were generally accurate.

Moira O’Neill, Head of Personal Finance, interactive investor, said: “This research suggests that as a nation, we need to talk more about risk and reward. With the majority of the nation’s liquid assets sitting in zero interest accounts, it seems that too many pension pots are less than inspiring too. Taking too much risk is dangerous – but so is taking too little risk, because you may not achieve your goals. Pension companies need to get far better at communicating this – in fact, the whole industry does.”

Don’t look now?

The paper reveals some successes in pension communication and engagement: people are checking their pension balances reasonably frequently and know what they contribute, as well as their risk level. 

Pension investors are also examining their pension fairly frequently, with 71% of respondents checking their paperwork within the last year and 68% checking online, according to Opinium. 

Boring Money found that respondents were frustrated and surprised when information such as asset class, sector, geography and sustainability could not be located easily - but that they were interested to know more. 

Holly MacKay, Founder of Boring Money, said: “Life companies are where pensions all began. But as the popularity of DIY investment soars, auto enrolment gathers pace, as more people take charge of their pensions, they need to up their game (but that doesn’t mean that there isn’t more the platform industry can do too). Just because the product structures make it easy for providers to limit a ‘look through’ to the underlying investment funds, often with gobbledygook names, we should not accept this as the status quo. This is not effective communication, nor transparency.

“We need to actually show people that their pension is invested. To communicate the Dragon’s Den concept that they own a bit of these businesses. To reinforce that their money is in the US, Asia, Europe and elsewhere.  And as demand for sustainable investing continues to increase, we have the opportunity to ride this wave of interest and show people what impact their pension is having. 

“I continue to call on the industry to help consumers understand what is actually inside their pension. Without this, we will never win on the engagement front. And without this engagement, trust and interest, pensions will continue to be ‘something done to us’ rather than something done for us.”