Offers of cash incentives make people ignore the fine print and switch their pension to a worse option, according to new research from leading workplace pension provider, People’s Partnership1 and the Behavioural Insights Team (BIT)2.
The provider of The People’s Pension commissioned BIT to conduct an online experiment3 with more than 5,500 people who hold a UK pension to test how they would respond to invitations to transfer their pension both with and without an incentive. They found that participants were 20% more likely to say that they would transfer their pension once seeing a cashback offer of just £100. That is despite the fact that higher fees charged by the new pension would have left them more than £1,000 worse off after just five years4.
The cash incentives were offered through adverts and personal referrals, and those who saw them were 20% less likely to evaluate the offer by looking at the finer details of the terms in the offer, via the FAQs. This made them unable to judge what they were being offered.
This follows previous research which found that 72 per cent of people who had made a non-advised pension transfer didn’t know exactly what charges they were paying on their new pension or what they were charged for their old pension.
People’s Partnership believes the pensions industry needs to provide simple, easy to understand information for members when transferring, and is today calling for pension switching incentives to be banned, given the clear role they play in inhibiting people’s likelihood of reading the small print – critical details which make thousands of pounds of difference to a pension at retirement.
Patrick Heath-Lay, CEO, People’s Partnership, said:
“This research shows cash incentives bias the pension transfer process in ways that are often harmful as they act as a barrier against people considering what is on offer and whether it is value for money. They are also less likely to read and understand basic details about their new pension, even when these are prominent, and they stand to lose money.
“Healthy competition between pension providers should be based on the quality of pension products, not marketing tricks that exploit flaws in the way people think. We believe this research highlights practices that are contrary to the FCA’s Consumer Duty.
“This new research from BIT further underlines how vulnerable people are when transferring their pensions without advice. It is clear consumers don’t understand the key elements of value within a pension and the industry clearly isn’t doing enough to make the transfer process transparent and comparable.
“We support moves by government and regulators to make value for money in pensions more transparent and comparable to the consumer. As it stands, the transfer market is too stacked in favour of pension providers, rather than in the interests of the consumer. This urgently needs to change.”
Ruth Persian, head of BIT UK’s Financial Behaviour Team, said:
“Pensions are complex and often confusing. Our experiment shows that ads promoting incentives, such as free cash offers, for transferring pensions can lead pension savers to ignore costs and other important information, and choose poor value products. As a result, pension savers could lose out on tens of thousands of pounds in retirement. This shows the importance of taking into account consumers’ behavioural biases in the sale of financial products and their marketing – something the FCA Consumer Duty now requires financial services to do.”
ENDS
Notes to editor
- People’s Partnership provides The People’s Pension, the largest independent master trust in the UK, serving more than six million pension savers across the UK and manages £25bn in assets. As a business without shareholders, it reinvests its profits with the aim to help customers and achieve better financial outcomes for everyone.
- The Behavioural Insights Team (BIT) is one of the world’s leading behavioural science consultancies, working around the world to improve people’s lives. BIT works in partnership with governments, local authorities, businesses and NGOs in over 30 countries, often using simple changes to tackle major policy problems and deliver improved public services and social outcomes. BIT was established by the UK government in 2010. In 2014 it became an independent social purpose company, part owned by the Cabinet Office and innovation agency Nesta, and since 2021 has been entirely owned by Nesta. For more information on our work and our team visit www.bi.team and follow us on LinkedIn, X, Instagram, YouTube and Medium.
- The experiment was conducted in September – November 2023 by the Behavioural Insights Team and People’s Partnership. It recruited a representative sample of 5,687 UK adults, targeting pension savers aged 35-67 years old. The research can be found here
Participants were asked to consider the scenario of a 55 years-old, who sees an offer for £100 cashback and chooses to transfer a £50,000 pot from a provider charging 0.5% to one charging 0.925%. Both pensions invest in the same global equity fund, returning 5%. After five years, those who transfer have £1,068 less in their pension. The experiment did not incorporate ongoing contributions and so, particularly if the transfer happened further out from retirement, the shortfall could be much larger.