The UK pensions market is facing numerous challenges preventing individuals from maximising retirement savings.
These include a lack of accessible advice, confusion over pension charges and features, and cumbersome transfer and consolidation processes.
These obstacles can be daunting, leading many to disengage or make poor financial decisions.
One of the most critical problems is the advice gap, which is particularly troubling in the pensions sector, where individuals are often required to make significant decisions about their retirement income.
Habit stacking involves linking a new behaviour to an existing habit, making the new behaviour easier to adopt and maintain
The complexity of the pension system, coupled with auto-enrolment and the increasing accumulation of multiple pots (an average of 11 per person, according to the Pensions Dashboard Programme) only adds to the confusion.
Tracking these pensions and understanding their associated charges can lead to indecision, further exacerbating the issue – and that’s if you find all the pots!
Over a year on from the introduction of the Financial Conduct Authority’s Consumer Duty standard and the ongoing The Pension Regulator’s value for money consultation, the lack of transparency around pension charges remains a challenge for the unadvised. Many individuals are unaware of the fees they are paying, for current or deferred pensions, or how these fees impact their retirement savings over time.
The complexity of pension products also makes it difficult to compare options and make informed decisions, leaving many at a disadvantage. Research from The People’s Partnership found 72% of people who transferred a defined contribution pension didn’t know the fees for their new pension.
The key is in aligning technology with existing habits or activities to streamline pension management at optimal points of times
Beyond decoding the charges and features, the next step in the process can involve transferring pensions, which can present another set of challenges riddled with paper-based processes and administrative delays. If the individual has got this far in their efforts to ‘sort out their pensions’, this transfer process can often be the ultimate barrier limiting their ability to benefit from better investment opportunities or lower fees.
A potential solution to these challenges lies in habit stacking (a concept from behavioural psychology that involves linking a new behaviour to an existing habit, making the new behaviour easier to adopt and maintain), technology and timing.
For example, leveraging technology to identify habitual processes and strategically introducing engagement opportunities at those moments could significantly benefit thousands, if not millions, of savers.
In the process of transfers, technology is already available and in use to make them faster, more transparent and less burdensome for both individuals and providers. However, by introducing a new habit into the existing transfer process – such as automatically finding pensions and presenting a simple comparison of features and charges – we could significantly drive up the right kind of pension engagement.
Despite the challenges in the UK pension market, digital tools and habit stacking offer solutions at scale to help close the advice gap
So far, I’m aware of only one workplace pension provider taking this innovative approach – Aegon. As part of its bulk (or scheme) transfer service, it includes key steps such as identity verification and an automated letter of authority. This enables newly transferring members to use this engagement opportunity, at no cost, to find their old pensions, review them with indicators based on charges and features, and, where safe to do so, consolidate – all online. Additionally, indicators highlight where advice is required for certain pots.
The key is in aligning technology with existing habits or activities to streamline pension management at optimal points of times. By simplifying processes – like finding old pensions, comparing and presenting their charges, and enabling truly digital transactions – technology can significantly enhance engagement when used at the right time. It also improves decision-making and future incomes.
If such approaches were more widely adopted, it could create a more accessible and user-friendly pension system, embedding engagement at crucial moments and removing barriers to informed choices.
Despite the challenges in the UK pension market, digital tools and habit stacking offer solutions at scale to help close the advice gap, simplify transfers and improve transparency, leading to more savers making better financial decisions.
Scott Phillips is founder and chief executive of The Pension Lab
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