FCA's stronger nudge 'wrong solution at wrong time'

Three years on from the Financial Guidance & Claims Act we finally have sight of how the Financial Conduct Authority plans to meet its obligation to increase the numbers taking up their entitlement to free, impartial and independent guidance. Unfortunately, it is a plan set up to fail.

On the face of it the FCA’s consultation paper CP21/11 The stronger nudge to guidance outlines how providers will need to introduce a final opportunity for pension savers to take Pension Wise guidance before accessing their pensions.

But you don’t have to read between the lines to realise it is more a cry for help – “we know the overall effect of this will be marginal at best so please let us know if you have a better idea.”

To be fair, the FCA hasn’t been given the tools needed to achieve the government’s stated ambition of making it ‘the norm’ for pension savers to use Pension Wise. That implies take up levels of perhaps 70% or even higher compared to current usage estimates that vary between about 15-20%.

The evidence from the ‘stronger nudge’ trials, which excluded those who said they’d had guidance or regulated advice in the previous 12 months, found the measures being tested boosted appointment take-up to about 11% compared to 3% in a control group. That may be a success in academic terms but would barely move the needle in the real world, particularly among those who stand to benefit most.

The stronger nudge is a backstop intervention and not a proactive engagement initiative. It’s a last resort triggered at the end of the customer journey when other measures – signposting, wake-up packs and TV ads – have all failed to make a material impact to close the gap between current usage and the government target levels of ‘norm’ usage.

By the time people are calling their provider asking for their money, the majority have already made up their minds, as the FCA acknowledges in the consultation.

The stronger nudge is the wrong solution at the wrong time and does not reach the right people.

We do have evidence that behavioural finance techniques can make a real difference in pensions. Automatic enrolment into workplace pensions has been a stunning success at broadening pension saving after years of decline.

Rather than telling people they can have a ticket on the retirement train and leaving them to hop on for themselves, it ushers them to their seat for the journey ahead. They are free to leave but most stay put and reap the benefits. That change in the choice architecture – automatically opting them in – has created a new norm in just a few years.

The FCA points out that Parliament has debated and ruled out both default guidance and also pre-booked Pension Wise appointments for savers five years before they are eligible to access their pension savings. In effect, the government itself has failed to support the bold measures that are the only way to deliver on its own vision.

Nobody is calling for the new guidance measures to have any measure of compulsion and there would be a right to opt out. The changes only need to introduce enough friction into the system to make it easier to take part than to opt out. And if it is focused earlier, before age 55, there can be no criticism it is an unwelcome obstacle to people accessing their cash.

As with workplace pension saving, we believe people will appreciate being led in the right direction. Our research found that fewer than 4% – one in 25 people – aged 45-54 with defined contribution pensions would opt out of a guidance session that had been booked for them.

Most importantly it would ensure that those with the most to gain from guidance – those with lower financial capability and less engagement with pensions – would automatically be included. That’s a point that Guy Opperman, Minister for Pensions AND Financial Inclusion, should appreciate.

The introduction of the free, independent and impartial Pension Wise service in 2015 alongside ‘freedom and choice’ was the key consumer protection measure designed to help them make good choices and avoid falling prey to scammers. Yet only about one in seven (14%) pots accessed in 2019/20 were taken after a guidance session.

Making guidance the norm is the right objective and has been shown to deliver real benefits, particularly to Middle Britain pension savers who can’t afford to make poor choices. If the feeble ‘stronger nudge’ is the best a constrained FCA is allowed to come up with then it’s time the government started to loosen the shackles.

Article published in Professional Adviser 7 May 2021 https://www.professionaladviser.com/opinion/4030883/stephen-lowe-fca-stronger-nudge-wrong-solution-wrong