Cash incentives encourage people to ignore the “fine print” and switch their pension to a worse option, leading the People's Partnership calling for these initiatives to be banned.
An online experiment by the People’s Partnership and the Behavioural Insights Team was conducted with more than 5,500 people who hold a UK pension to test how they would respond to invitations to switch their pension both with and without an incentive.
Participants were 20 per cent more likely to switcg their pension once seeing a cashback offer of just £100.
This was despite the fact the higher fees charged by the new pension would have left them more than £1,000 worse off after just five years.
The People’s Partnership CEO, Patrick Heath-Lay, 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.
“Heathy competition between pension providers should be based on the quality of pension products, not marketing tricks that exploit flaws in the way people think.”
The cash incentives were offered through adverts and personal referrals, and those who saw them were 20 per cent 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.
Heath-Lay said this highlights practices that are contrary to Financial Conduct Authority’s consumer duty.
Call to action
The People’s Partnership believed the pension industry needed to provide simple, easy to understand information for members when transferring and also called for pension switching incentives to be banned.
“This new research from BIT further underlines how vulnerable people are when transferring their pensions without advice,” Heath-Lay said.
“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.”
This followed previous research which found 72 per cent of people who had made a non-advised pension transfer didn’t know exactly what charges they were paying on their pension or what they were charged for their old pension.
Additionally, BIT UK head of financial behaviour team, Ruth Persian, said: “Pensions are complex and often confusing.
“Our experiment shows that ads promotion 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.”
tom.dunstan@ft.com
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