Why pensions are both dangerous …. and exciting!

Pensions can seem like a dauntingly complex and - let’s be blunt - boring subject. But they are so important. Bethan Livesey and Paul Britton explain why Share Action has always cared passionately about connecting people with their pensions - they even have t-shirts that say ‘ask me why your pension is dangerous and exciting’. Apparently these are not compulsory for staff - yet!

Your pension will most likely be the basis of your standard of living in retirement.  And, if retirement seems too far off, your pension is having an impact in the world around you right now.  Where it is invested, and where it is not invested, are hugely impactful. The people who manage your money have rights and powers to influence some of the most powerful companies in the world, on our behalf.  Isn’t that just a bit exciting?

Our passion for pensions has only increased with the advent of automatic enrolment, which has brought over nine million people into the pensions system.  Every month, those people will be paying a portion of their hard-earned salary to a pension provider to invest on their behalf.  For almost all of these savers there is no guaranteed final salary pension at the end of a career – the size of your pension pot will depend upon how well it is invested.  That is a huge amount of trust to put in a pension provider, but our recent research has shown just how poor the lines of communications between saver and provider are.

Thanks to the Friends Provident Foundation, ShareAction has been shining a light on the way pension providers invest money and how they communicate with pension savers. Our 2018 survey, The Engagement Deficit, ranks the largest auto-enrolment pension providers on their approach to responsible investment and engagement with savers.  And our latest research piece, Pensions for the Next Generation: Communicating What Matters, stands back and looks at how these providers might think more innovatively to communicate pensions in a way which engages a new generation of savers.

We found some good practice- to be excited about – and some troubling trends – which seem quite dangerous.  We looked at the policies and practices in the default funds, which is the fund most people are enrolled into and will stay in unless they make an active choice.  These are the trends we found:

  • Pension providers are being lax on tax – Seven out of the nine auto-enrolment providers had no specific policy on aggressive tax policies in their investee firms. Only NEST and Royal London looked at this issue.  Isn’t it illogical that your pension could be invested in companies which don’t pay much tax and thus threaten the types of services you rely on now and in the future?
  • It is a climate lottery out there – NEST is the only provider to have a measureable and time-bound target to reduce the default funds’ exposure to climate risks. It scored 86 per cent in relation to our climate change questions whilst no other provider scored more than 32 per cent. Not only does climate change present a risk to the financial success of your pension, but what kind of retirement can you have in a world ravaged by global warming?
  • Exclusions on chemical and controversial weapons could go further – we found gaps in providers’ policies that would allow some to invest in chemical and biological weapons, not something that anyone wants to be financing with their hard-earned money!

To find out how your pension provider performed, see our ranking.

If you are starting to worry about just how dangerous your pension is, you might want to find out a bit more about it.  The other part of our survey looked at how well providers communicate with their savers. We found a real mix of practices. Overall, we felt that providers were relying too much on savers to proactively search out information without undertaking a push to reach out to savers or to think creatively about how they frame communications in an engaging way.  We found good practice in, for example, Legal & General hosting an annual member forum and using video comms.  We liked Scottish Widows’ ‘pension bus’ that visits workplaces and we could see that Standard Life is thinking innovatively through its pensions app.

Given how well it did on the responsible investment side, it was disappointing to see NEST slide down the rankings in the communications side.  This is a real missed opportunity.  In our work, Pensions for the Next Generation, we flagged how a significant portion of younger savers care about the impact their savings have on the world around them.  Behavioural research shows that people engage better with subjects when they can make an emotional connection to them.  However, too often, the information supplied by pension providers is not accessible.  Few people are feeling switched on to their pensions as a result. Furthermore, younger savers want to do their financial planning digitally on smart phones and tablets, but the pensions industry is not leading the way in this area.

We argue that auto-enrolment providers should innovate in relation to the type of information they provide to members and how it is conveyed. First, they should take steps to understand what their savers care about.  They could draw on the responsible investment we know they do and use this as the basis of messaging to savers.  For example, imagine a survey of savers asks them which of four Sustainable Development Goals they care about and a saver chooses one on gender equality. The next year, the pension provider could send information to the saver framed through the lens of “you said you cared about gender diversity, here is what we have been doing to promote gender equality at the UK’s largest companies”.  The email would go some way to making the saver feel listened to and hooking them in with something they find interesting, before updating them about the financial aspects of their pension.  Innovation in communication methods, particularly in the digital space, could lead to providers having a better understanding of what their savers want and how to encourage them to save more, including via better designed alternative fund choices for the most engaged savers to select.

Both of these pieces of research are informing ShareAction’s work with policymakers and industry.  We are out there talking to pension providers and policymakers about what they could do to improve in respect of responsible investment and communications.  Our recommendations can be found in the reports, but we also had a stab and making pensions interesting by producing our own short video.

Because we don’t want to be the only people who find pensions exciting!

Bethan Livesey is Head of Policy and Paul Britton is Research Officer for ShareAction, a charity that campaigns for a more responsible investment system.

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