It’s widely known that people are not saving enough for retirement. And when they reach retirement, they are struggling to make smart financial decisions.
But how can we expect savers to engage more, save more and make informed decisions about investment strategies when the Financial Conduct Authority's most recent Financial Lives Survey shows that only 8 per cent of adults receive financial advice, and more than a third of non-retired adults have never thought about how they will manage financially in retirement.
This is a particularly worrying problem for generation DC (those with the more modern defined contribution pension) who, unlike those with defined benefit pensions, need to make active decisions about how to manage their pension pots in retirement.
Meanwhile, in the background, inflation is eroding returns on our cash savings.
What it all boils down to is that customers need more support. And one crucial way in which people could get more support is through new forms of advice and guidance.
That is why the Association of British Insurers was extremely pleased to see the government and FCA propose a targeted support regime as part of their ongoing advice guidance boundary review.
We have good news for consumers, the industry and the regulator alike: targeted support works.This regime would enable firms to use limited personal information about a customer and their circumstances to provide better support.
Firms would first identify whether a customer falls within a target market and then make suggestions to the customer that align with the needs, characteristics and objectives of that target market, while acknowledging that the particular customer may have individual needs that have not been identified.
And we have good news for consumers, the industry and the regulator alike: targeted support works.
We know this because the proposed targeted support regime is very similar to one that the ABI has been supportive of for a long time: personalised guidance.
This is where providers can use information about their customers to tailor communications and product journeys to help those customers achieve better outcomes.
Under current rules, providers cannot test the effectiveness of personalised guidance (or targeted support) because doing so would cross the boundary between what counts as regulated financial advice, which involves a personal recommendation, and guidance, which involves the provision of generic, factual information about the options available to a consumer.
To get around this hurdle, we partnered with Thinks Insight & Strategy’s behavioural team to test the impact of personalised guidance on decision-making in an experimental environment.
The results prove our hypothesis that personalised guidance can be very effective in helping customers make better decisions, insofar that it suggests a course of action.
Given the similarities, we think these findings provide useful lessons (and bode extremely well) for the development of a targeted support regime.
In our experiment where participants needed to choose how much to withdraw from a hypothetical pension pot, 14 per cent of participants made the right choice when provided with generic guidance on income tax implications.
When given personalised guidance with short, simple text and which highlighted a withdrawal amount based on the customer’s circumstances, 76 per cent were able to withdraw enough to cover their immediate expenses but not so much that they unnecessarily paid higher rate tax.
This suggests that when guidance is tailored to a customer’s circumstances, it can have a significant positive impact on the effectiveness of their decision-making.
What’s more, our research revealed that participants value personalised guidance relative to generic guidance. For example, they were more likely to pay for guidance that was tailored to their circumstances and which highlighted salient options for them to choose.
Participants also indicated that personalised guidance was more likely to be sufficient information for them to take effective and informed decisions.
These findings are remarkable and very clear, strengthening the consumer case for creating a targeted support regime via the advice guidance boundary review.
Our findings demonstrate that changes to enable more tailored support for consumers will have a wide-reaching positive impact across the sector.Providers know so much about their customers already, and in conjunction with initiatives like open finance and pensions dashboards firms can help those customers make informed, effective decisions using the right data at the right time.
This will deliver both good outcomes for customers and avoid foreseeable customer detriment. This is what the new consumer duty is all about.
More help for customers, whether through targeted support or otherwise, can have a wider impact too. Driven by a desire to grow the UK economy, the government is making various changes to pension and Isa rules, and more support can help turbocharge many of these anticipated reforms.
If the value of pension saving and Isa investing can be articulated more clearly to customers, with more engaging and relevant communications, then we should see savers actively increasing their contributions or investing for the first time. This will help grow the pool of domestic capital available to be invested.
Our findings at ABI demonstrate that changes to enable more tailored support for consumers will have a wide-reaching positive impact across the sector.
At a time when the industry is calling for savers to pay their pension some attention, it is essential that we give them the tools they need to do so.
Yvonne Braun is director of long-term savings at Association of British Insurers
