Many will not read it, let alone understand it given the mountain of paper providers need to use to give them appropriate regulated information.
So where do members turn for information and advice and does their pension statement provide them with the knowledge to make a decision on whether they are invested in the right funds? Many members are getting their information from the media. The almost constant and nationwide negative press coverage which is highlighting the downside of pension funds as a result of current market turmoil. The average scheme member will be wondering what can now be done with their equity based portfolio and turning to find the answers and solutions having, to date, been given only the problem, by media commentators.
Should the answer be to stick with the principals that were originally adopted for these schemes, in that equities have historically outperformed other asset classes over time? Current trends may well change that view and ‘time’ may become a very long time indeed. One reaction to the negative press commentary could be that people move out of equities; the likelihood here is that they could be selling somewhere near the bottom of the market, although there are not many pundits or commentators who could be confident of when that might be and at what level.
Behavioural finance tells us that members do not make rational pension decisions. All too often psychological barriers will influence their choice. Human behaviour means we do not operate in a society of active investment decision makers. Natural inertia will often prevent members from reviewing their strategy, which can leave them anchored to a fund choice that isn’t appropriate for current market conditions. US and UK evidence suggests that less than 10% of investors change their funds (Vanguard Group, 2003). Participants are sensitive to the market at enrolment stage; starting values tend to have strong influences on decision making. Even worse, those that do review their selection might fall into the trap of ‘selling low and buying high’ repeating this several times could have a significant and negative impact on their pension pot.
So what should they do? Risk profiling is one way to compensate for offering members too much fund choice and as an industry we need to try to overcome some of the psychological barriers which impact on consumer decision making. However, for some schemes with over 200 funds, a sophisticated modeller could still provide the average scheme member with a baffling number of funds to choose from.
Fundamentally, providers in conjunction with advisers need to redesign fund solutions around the best ideas with the best governance whilst remaining mindful of their duty of care. A scheme should have a well thought out and structured default fund, blended ‘white-labelled’ funds and a tiered range that provides access to choice, but only for those that want it. Members should have access to clear information and take more interest in pushing advisers to review the investment solutions in their scheme, as some are looking very old, tired and may no longer be fit for purpose.
If we are not prepared or able to give scheme members’ true investment advice, then we have a collective responsibility to ensure that we communicate in a pragmatic and effective way to members, some who are still looking to find the answers in the daily paper or on the breakfast news.