Pensions engagement - the solution. Spoiler: You're probably not going to like it

In part 1 of this article, I explored why the current structure of the pensions industry does not lend itself to an engaged consumer model. In short, I argued that the problem is that the consumers are not the buyers, and vice versa.

There are two solutions; one arguably far more palatable than the other.

Solution 1 - Rip it up ...

In this model, we would allow pension consumers to choose their own provider. Every employer would have to permit contributions go to one of a few dozen TPR-authorised or FCA-regulated providers. This would be much like employers paying salaries to different banks for different employees - the employee could choose the provider they want, but because pensions are 'hard', there would probably need to be a default provider.

Maybe that default would be the plan the member contributed to most recently, maybe the default would be at employer level, maybe it would be a single national default. That's a different problem.

Members having buying power would make it worthwhile for providers to market to members and would revolutionise pensions in the UK. Every aspect, from product design to marketing, would be affected.

However, not all of those changes would be positive. One impact is that providers would suddenly have a strong reason to start spending big on marketing. Your TV dramas would start to be 'brought to you by' pensions providers. Pensions adverts would start appearing on buses and tubes. Minor celebrities might start talking about pensions on their insta feed.

Unless there are savings elsewhere, more money being used to promote pensions will mean higher charges for members than might otherwise be the case. This makes for an economically less efficient model than we currently have. That is the cost of facilitating genuine engagement.

Another consequence stems from why the pensions industry is organised this way in the first place. Government mandated that every employer in the UK should set up a pension plan for employees. It followed that model because it believes that a few very big suppliers is a more cost-efficient model than a lot of very small ones.

The same 'big is better' logic would be true of any number of other consumer-product industries, but no others have been forcibly structured to be employer-facing in the way pensions has been. It seems pensions is a special case.

Why does government care about economies of scale in pensions? One reason is that pensions are a societal good and too important to be left to chance (or market forces). There's no doubt that is why auto-enrolment happened the way it did.

Therefore, for the pensions industry to be structured into a model that might lend itself to consumer-grade engagement (and innovation), we may need to lobby government to tear up the current pensions industry model and adopt a less efficient operating model. Who knows what other implications that might have.

I did say you probably wouldn’t like it.

Solution 2 - Auto-enrolment

Happily, there is a less traumatic alternative. We can accept the industry as it is currently constructed and instead look at how big changes to pensions have been accomplished to date.

Does anyone believe that the millions of people newly brought into pensions by auto-enrolment would have found their way here by engagement alone? The free market is a wonderful thing, but unlike 'soft compulsion', it rarely produces 95% market penetration (by way of 'proof', 'only' 90% of UK households have the internet).

In this model, we need to put our engagement efforts into lobbying government to act on the recommendations it solicited and to start to increase auto-enrolment minimas.

Once people start to see meaningful sums of money on their pension dashboards, they will engage. If all goes well, they may only need to make choices around one issue, one of the most engaging that exists – how to spend it.