Julie Walker explores the ways to increase DC members’ investment education and engagement

In the countdown to Christmas, with Leveson still taking up most of the parliamentary limelight, it was hardly surprising that the Department for Work and Pensions select committee’s re-launched inquiry into governance and best practice in workplace pensions wasn’t making front-page news. But now in January, with an eye on where emerging policy may be transformed into administration practice, it’s worth taking a step back to consider whether we’ve been asking the right questions when it comes to DC members.

A little light reading
Drawing on evidence from industry, representative bodies, economists and consumer groups and coming in at just under 400 pages, the inquiry’s recently published written responses make interesting, if not entirely non-partisan reading. The ‘good outcomes for DC members’ strand includes some particularly thoughtful and thought-provoking suggestions on the linked themes of member communication, education and informed decision making that fly in the face of the accepted industry position on member engagement.

Making information meaningful is a key issue in DC administration – it’s highly unlikely that any of us engaged in front-line administration, dealing daily with the many weird, wonderful and fundamentally mistaken assumptions raised by members, would allow an average DC pension scheme member to make decisions about our financial futures. Somehow though, we need to provide those same members with all the information they need to make the right decisions about their own pension scheme. This is the central contradiction in the distribution of risk in the DC environment which has seen untold weeks, months, years and millions of pounds spent in pursuit of the ‘eureka moment’ that would see members take the reins and start actively driving decisions about their long-term financial futures.

Integrated solutions
Support for better, more co-ordinated member information comes from across the board in the written submissions. Software house HISL’s ‘virtual big fat pot’ proposal, bringing together aggregated information from all the member’s pension sources through a single secure portal, is echoed by both NOW: Pensions and the TUC in their support for disclosure on the ‘Danish model’, a co-ordinated online solution allowing members to access all of their pension information through a single platform. Although estimates of the associated costs understate the potential cost of delivering and maintaining a collaborative single access model, this is new and exciting thinking for the UK industry and a challenging (but expensive) development in DC administration.

Is more really more?
The co-ordinated approach outlined above is based on the premise that lack of engagement is the main obstacle to active participation and a commitment to better member communications and education ultimately leads to better member decisions. In practice, responses from right across the political-economic spectrum reflect a different experience, pointing to member ‘inertia’ as the dominant feature in the DC arena and questioning whether significant member engagement is even realistically achievable.

The statistics on member inertia are striking – Fidelity’s figures show only 10 per cent of their active members accessing their pensions web channel each year, while over 80 per cent of members remained in their scheme’s default fund and only 45 per cent of annuitants took up the open market option.

Research based on behavioural economics shows that members don’t actively manage their own investment decisions because they -

Don’t• understand the implications of information provided
• translate financial information into rational decision making
• relate short-term decisions to long-term consequences.

Do• default to the path of least resistance
• apply simplified thinking to complex decisions
• vastly over-estimate their likely retirement income
• tend to avoid immediate costs
• distrust information from pension providers.

The PMI’s own research showed almost half of their members felt it was unrealistic to expect members to make informed investment decisions, a pragmatic position supported by Ipsos MORI’s experience of speaking directly to pension scheme members on whether they actively engaged with and understood their investment and retirement options.

Based on these findings, education will struggle to make a meaningful difference because member behaviour is fundamentally unchangeable. In this context, the choice of default fund and the mechanics of the annuitisation process were seen as far more significant factors, with member engagement coming a distant second in obtaining better outcomes for DC members.

Written by Julie Walker, associate, Barnett Waddingham

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