Generic Advice and Pensions

1
Generic Advice and Pensions

• Robert Laslett, Chief Economist DWP
• 14th March 2007

2
The pension reform context

• DWP is aiming for a system where
• The large majority of people will be better off
  through saving for a pension
• Thanks to auto-enrolment
• It is easy for people to save in a pension
• People have a chance to opt out if they want
• Government ensures that good information is
  available

3
The pensions policy background

• Pensions Bill 2006-07 State Pension reforms make
  the return to saving higher and more dependable
• Earnings indexation of BSP
• Flat rating of S2P
• Improved coverage
• Savings Credit reforms
• Proposed Pensions Bill 2007-08 Private Pension
  reforms improve access to occupational retirement
  saving
• Automatic enrolment and employer contribution for
  employees
• Simple exemption for good employer schemes
• Low-cost personal accounts for others

4
Market functioning information doesnt work by
itself in the market for pensions

• They are long-term credence goods
• They are associated in peoples minds with old age
  and dependency
• Pension information is complex and unfamiliar
• Most people are not confident making informed
  judgments and want to be guided
• In such situations, people typically rely on
• Trusted advice often word of mouth
• Trusted brands
• Neither information nor advice seem to change
  behaviour

5
Automatic enrolment changes things

• Peoples inertia will tend to keep them saving
• But it is important that people feel confident in
  the choice they have been given
• Three challenges for information in this
  environment
• To encourage people to opt out when appropriate
  (and discourage it when inappropriate)
• To encourage them to save beyond the opt-out
  level when appropriate
• To encourage tem to choose appropriate fund types

6
Protection for other parties will remain an issue

• Personal accounts will be an occupational scheme
• Regulated point of sale advice will not be
  required
• But the information or advice provided at the
  time of enrolment will have to protect providers,
  employers and governments

7
What does research tell us?

• Only half of people seek any information or
  advice when purchasing a financial product
• Distrust of potential information providers is
  widespread
• People typically like and appreciate information
  and advice
• Many people appreciate pension forecasts
• Many attend workplace pension presentations and
  find them useful
• People also seem to like the guidance implicit in
  automatic enrolment and default fund choices
• International evidence suggests employees mainly
  stick with default fund choices

8
The challenge design for customers

• To produce forms of information and advice that
• Contain what people need to know
• Motivate people by telling them what they want to
  know
• Are structured by what people can understand
  which may be very simple and partial
• This calls for a considerable research effort
• To find out what people need, want and can
  understand
• To differentiate this by customer segments
• To understand how to refresh the message as
  circumstances and expectations change

9
The challenge - delivery

• To produce forms of information and advice cheap
  enough to be efficiently offered to lower and
  middle income savers
• To develop networks for delivering this
  information and advice to up to 10 million new
  pension savers by 2012
• The scale suggests that multiple solutions may
  work better than a single approach
• The need for trust suggests we should build on
  what already works well