Empowering Pension Savers: Why Making Investment Decisions Isn't Always the Best Approach 

Most people will have had a similar experience when starting a new job. You were sent information on role, pay, holiday allowance, benefits and pensions.  The pension information you were sent will have included details about what is available to them, where to find out more information, and maybe a hard copy of a scheme booklet. All of which may prompt the employee to ask themselves some questions: How much is my employer asking me to save? If I can afford to save more, will I get extra contributions from the employer? Where does this money go?

Many people will opt to save into company’s pension scheme, and hopefully, aim to save as much as they could reasonably afford. But they may still be plagued by doubt. Is opting for the company scheme just taking the easy path and avoiding any real thinking about the choices available and the long-term future? Furthermore, they are unlikely to be highly confident about their ability to make those judgements even if they wanted to.

The reality is that the vast majority of pension savers are not investment experts. So, why would we want them to make decisions on how to invest what is likely the largest pot of money they have? More often than not, this pot of money will ultimately be the largest determinant in the standard of living this individual (and their spouse) will be able to enjoy in retirement.

This raises a crucial question that is often ignored:

The best approach may be to avoid referring to ‘pensions’ and ‘investments’ at all. These are the very terms that can confuse or create anxiety for people who not investment professionals. A better approach would be to ask questions that relate to their lives, and which are more intuitively meaningful. For example:

The first two of these questions are simple but significant and will probably reveal enough about the individual to place their pensions savings into an appropriate off-the-shelf solution. This off-the-shelf solution would be tailored to broadly meet their key requirements; reducing exposure to risk as the member approaches the date at which they need their savings and investing in assets that match their requirements in retirement.

Off-the-shelf solutions also have the potential to put members in a better position than if they make an unadvised decision regarding their own investment strategy. This is particularly true if the member engages actively when they first join a new scheme, but then duly forgets about it and the decisions they have made.

The third question from the list above is about reflecting member views in the pension scheme’s investment strategy. For example, it would help to determine whether the member wants to exclude particular types of investment or business from their portfolio, perhaps for religious or ethical reasons. Increasingly responsible investment is being spoken about in this regard. Many individuals are now making lifestyle decisions to help combat climate change, but one of their biggest financial assets - their pension savings – may still be invested in all the top carbon emitting companies.

Pension scheme members should not be driven always to invest in the default option, but the default is designed to be the best solution for members who do not wish to make decisions themselves. Luckily, most members (>90%) are in default funds and should sleep easy with that decision.

Crucially, none of this should undermine members’ wider engagement with their pension and allow them to simply forget about it. Current levels of engagement suggest that the average member underestimates the importance of their pension savings in supporting their retirement expectations. This underestimation leads to lower contribution rates (often with members leaving “free” money on the table by not maximising the match from their employer), pension pots being forgotten and finally an ‘expectations gap’ between members’ aspirations for retirement and what is sustainable.

Far from causing people to disengage from their pension plans, taking the anxiety out of decision making when people join a scheme might even encourage them to save more.