Financial illiteracy and poor support plague concerned savers

A paper commissioned by pension consolidation platform PensionBee criticised the pensions industry for letting non-advised drawdown become a norm in retirement, despite low levels of financial literacy leading to poor decisions. Some 37 per cent of all drawdown customers do not take advice.

The Financial Conduct Authority first uncovered the scale of the problem with non-advised drawdown in its 2017 retirement outcomes review. It found that one in three drawdown customers was unaware of how their money was being invested, with a significant chunk putting their savings at risk of erosion by inflation in cash or cash-like vehicles.

It is now more important than ever for providers to develop straightforward and flexible products to help consumers draw down simply and efficiently. The industry needs to come together and continue to innovate – it’s time to give back control to the consumer

Romi Savova, PensionBee

But the regulator has postponed its remedy for the issue, which would require providers to offer three suitable investment pathways for different levels of risk, as part of its shedding of non-critical work during the Covid-19 lockdown.

According to PensionBee's ‘Drawdown Doldrums’ report, the inertia used to drive defined contribution accumulation is becoming a problem at retirement, with 94 per cent of non-advised drawdown sales made to existing customers. By contrast, 65 per cent of members who take independent financial advice end up choosing a product from a different provider.

Romi Savova, chief executive of PensionBee, said: “People are confused about how to access their pension pots, lack a basic understanding of the available options and are daunted by the lengthy and complex process.” 

“It is now more important than ever for providers to develop straightforward and flexible products to help consumers draw down simply and efficiently. The industry needs to come together and continue to innovate – it’s time to give back control to the consumer.”

Too many drawdown customers, too little advice

Fintech PensionBee has argued that the current economic situation exacerbates the problem for Britain's DC savers. The growth of the DC system means that a quarter of those aged 55-64 now have a pot worth more than £90,000, but low interest and annuity rates mean this will produce only as much income as would have been produced by a £51,500 pot back in 2008.

Adding to the pressure to cash out into unsuitable products are financial concerns stemming from the coronavirus crisis.

The report lists the results of a survey of 961 people aged between 55-70, which found 34 per cent “agreed that decisions about accessing their pension were harder due to the coronavirus pandemic”. 

Sixty-eight per cent were worried about the value of their pension, while 22 per cent agreed that they were more likely to make a withdrawal due to the pandemic.

Pension providers are still failing to offer proper advice to concerned members, the report found, with 69 per cent of respondents saying that their pension provider “had not contacted them at all regarding the coronavirus pandemic". Just 11 per cent reported feeling “very well supported to take decisions about their pension".

FCA criticised for delays

PensionBee has called on the Financial Conduct Authority to reverse its decision to delay its investment pathways rollout until February 2021, as reported by FTAdviser in April.

LCP partner Steve Webb told Pensions Expert: "Default pathways will be helpful for those entering into unadvised drawdown, who will generally be those with smaller pots. Whether or not those pathways are in place, providers should certainly be providing generic information and guidance to savers about the current economic situation and it is disappointing to hear that so few appear to have done so.”

But he added: “The biggest harm from pension freedoms comes when individuals cash out their entire pension pot, leaving the money sitting in a current account or cash Isa. Nothing in the FCA’s proposed investment pathways would deal with this fundamental problem.”

The FCA has been approached for comment.

Self-select investors a liability to themselves

Meanwhile, low levels of financial literacy and confidence are also causing issues for savers still accumulating pension wealth.

A study, commissioned by master trust The People's Pension and asset manager State Street Global Advisors, found that common behavioural biases mean average savers are often unable to match the performance of a default fund.

Citing a 2016 study by the OECD’s International Network on Financial Education, which showed that adults in the UK ranked 15th out of 30 countries measured in terms of adult financial literacy competencies, the report said: "Aiming for the average member to become their own chief investment officer is a bit like taking up climbing by seeking to ascend Mount Everest."

Overly cautious investors withdrawing to cash could lose as much as £247,000 compared with someone who amasses £430,000 in a default fund over 33 years. Performance-chasing, where savers buy into successful funds at a high price and then sell at a low price when they falter, could cost members £173,000. Less egregious mistakes, such as failing to diversify or forgetting to derisk, could still cost around £30,000 in lost returns.

Nico Aspinall, chief investment officer at The People’s Pension, said: “Most people enrolled into a workplace pension stay invested in a default fund, which, as this study confirms, is by far the simplest path to take to achieving good returns. There will undoubtedly be some who will want to take investment decisions and try to quickly make up the losses from this year’s fall in markets, but this research shows that DIY investment is fraught with dangers."

“Members in the default fund typically face lower charges, and every investment decision is made with their best interests at heart, improving their retirement outcomes.”

SSGA head of pensions and retirement strategy Alistair Byrne noted: "Investment decisions are complex, and most busy pension savers can’t give them the time and attention they deserve. Investing in the default strategy means putting your future finances into well-governed and efficiently scaled products managed by experienced professionals."