Adrian Boulding: A little (financial) knowledge is a dangerous thing
Is ever-increasing engagement with pension savings always the right thing? Here Adrian Boulding argues a little knowledge can be a dangerous thing for people not prepared to put the effort into getting to grips with their finances...
I am worried by the relentless clamour from politicians and industry commentators for greater consumer engagement with savings.
They presume that engagement is always a good thing. In this article, I argue that there is a hockey stick-shaped curve defining the relationship between greater engagement and improved outcomes. I believe increasing engagement will only favour those prepared to put in the effort to get themselves round the dip of that hockey stick's blade and up onto its handle where engagement starts to deliver much more certain and positive financial outcomes.
During last year, we conducted some market research to explore the savings habits and financial engagement levels of millennials aged 23-36 years old. What we found surprised us.
A great many young people were saving hundreds of pounds each month into a range of savings and investment plans. Many are budgeting hard to set aside rainy-day savings funds. Others are building holiday funds or first home deposit pots. Average monthly savings among this age group were at a very healthy £161.65. London-based millennials were putting aside more than £200 each month.
We also discovered that this younger age group put a significant store by digital financial platforms and mobile apps. They were grateful, even loyal, to providers that helped them budget more effectively or offered ‘on the fly' functionality like micro-investing in a range of investments via mobile investment apps like Moneybox; or moving surplus monies into savings accounts at a stroke of the finger (which many banks now offer via their apps).
They also favoured the idea of digital tools which send push notifications when their personal financial situation has changed markedly - perhaps triggered by a rise in their auto-enrolment pension contribution, a buy-to-let investment gaining equity value, or a share gaining more than 5% in the last quarter.
Timely provision of new information or analysis can, of course, trigger engagement and action. At the very least, it's these sorts of alerts which help (re)engage customers and get them thinking about investing and saving more.
The open banking revolution has certainly made it much quicker and easier for bank accounts feeds to be authorised to send through their valuable transaction data to digital platforms, perhaps for automatic analysis and insight delivery or for real-time cash flow analysis and reconciliation by small business owners and their accountants.
We all know that changes of spending habits or household income levels tend to presage much more significant lifestyle changes which can demand a financial review - creating a window for timely and informed (re)engagement by advisers.
This brings me onto a wider point about digital financial platforms, including perhaps the pensions dashboard in the future. The well-known phrase attributed to Alexander Pope circa 1709: "A little knowledge is a dangerous thing", applies here.
As people begin to get their hands on new knowledge about their financial affairs online, there is a real danger that having viewed these prompts, nudges and notifications on their mobile devices or PCs, they may then leap to hasty and sometimes downright poor decisions to their financial detriment.'Dangerous thing...'
We've seen what happened as a result of the widespread media attention and other communication associated with pension freedoms. More than 1.5m defined contribution (DC) pots have been accessed in the April 2015 to September 2017 period alone. Of these, 55% were fully withdrawn. And of these ‘withdrawers', more than half plonked their retirement savings straight into a bank or building society. A reading of the CP18/17 associated with the FCA's Retirement Outcomes Review finds that "someone who wants to drawdown their pot over a 20 year period could increase their expected annual (retirement) income by 37% (simply) by investing in a mix of assets rather than just cash."
Many encashments were the direct result of engagement. The consumer received a letter from their provider with information on the new pension freedoms, and they literally seized the opportunity. Most did this without consulting an IFA or any of the government-sponsored guidance services. And nearly all of them made this move to their financial detriment as inflation is now eating away at their cash pile at a rate of between 2.5% and 3.5%, depending on where inflation is sitting, and the measly rate offered by their bank's account. For many of them, a little knowledge has indeed proved a dangerous thing.
I read an article in one financial trade magazine last week that indicated that the pension dashboard, should it ever arrive, offers yet another route to poor decision-making.
The argument ran: "Pensions are now so complex, the average consumer has absolutely no chance of being able to interpret dashboard results with any confidence. Just imagine they relied on the information. Think of all the ways they could go wrong."
Although the sentiment might appear patronising, this adviser may well be right that lots of people are liable to see their shiny new pension dashboard-provided digital display of all their pensions assets. And, without properly considering the valuable benefits within older defined benefit and early DC plans, for example, begin consolidating their retirement savings into higher charging plans, perhaps attracted by buzzy advertising.
'The Hockey Stick Of Engagement'
I call this ‘the hockey stick of engagement' effect. As the government, providers and advisers begin a new process of engagement, perhaps via a new digital platform or email communication linked to regulatorily-enforced increased transparency (e.g. the new MiFID II-linked quarterly investment report or digital wake-up pack); they need to be conscious that the little extra knowledge they are delivering might trigger poor decision-making.
Consumers need to decide what type of saver they are. I think the majority sit in the ‘time poor' camp. For their own good, this group need to understand that they either can't or won't devote enough time to get properly to grips with their savings.
This group needs to let go. Despite attempts to engage them, they need to leave things to the experts. For those that can afford one, that means a professional financial adviser. For the rest, they should leave matters to the trustees of their workplace scheme, or to their employer who will have chosen default schemes and default investment funds having themselves taken professional advice.
My other group, which I believe will only ever be a minority, can educate themselves, take control of their own finances and make decisions that will drive good outcomes. Technology will help, and there is a wealth of self-help information out there, but they mustn't underestimate the time commitment needed to garner it.
Personally, I'm trying to be in the engaged group, and just recently signed up for the webinar my self-invested personal pension provider (who supports both IFA and D2C business) put on about how to read company accounts.
Despite using the tech to add it to my diary, the reminder ‘ping' only served to alert me that I'd have to miss it, as my day job was overrunning. I will have to redouble my efforts - putting in more time to get myself round the hockey stick of engagement, but for now, my investment skills and abilities remain rather lower than a discretionary fund manager's!
Adrian Boulding is director of retirement strategy at Dunstan Thomas