Riding the referendum result roller-coaster
27 June 2016
In recent months there has been much discussion about the extent of the changes taking place in the world of pensions and now, as a direct consequence of the outcome of the referendum result we can only assume that the pensions change curve is going to get even steeper.
So many of the laws and regulations impacting UK pensions have been governed by or at least influenced by the EU that it is going to be staggeringly difficult to predict what will now happen – just figuring out how the legislation will get untangled is going to be challenging.
So we are well and truly into unchartered waters but I am confident that in time we will get back onto firm ground and hopefully the evolution and development of the UK’s pension system will continue unchecked.
But what I am far less confident about is how ordinary people, who aren’t sophisticated investors, who may be investing for the first time, respond to the wild fluctuations we have been seeing in the stock market. Unfortunately, research shows that many people panic and leave the market when times get tough – rational thought leaves us when panic sets in.
All this reminds me of my time as an authorised adviser and specifically at how varied the sense of panic was amongst financial consultants during times of extreme volatility.
At one end of the scale there were those who were very worried that their clients might be frightened by market turmoil and as a result encash their investments.
But there were others that were calm and not spooked at all. They knew their clients wouldn’t encash. Why? – because they had educated their clients through a consultative sales process and fore-warned them that wild fluctuation would happen from time to time, and the best thing to do when (not if) that happened was almost always to do nothing and ride out the roller-coaster of the markets.
My concern now though is that the vast majority of the millions of people that have been automatically enrolled into pensions have not gone through any consultative sales process at all – they have had no education whatsoever to support their decision-making because they have not had to make any decisions.
Will such individuals have a higher pre-disposition to ‘panic and run’ in times of extreme volatility? – I think so.
This take me to a key point – that enrolment does not mean engagement.
Advisers and pension scheme providers need to ensure that the communications processes and procedures they implement are able to educate their swathes of new clients in such a way that the risk of the ‘panic and run’ reaction during times of turmoil is minimised.
And there’s another factor that makes all this so relevant – pension freedoms. Do the flexibilities available under pension freedoms increase the likelihood of people exiting the market en masse at times of extreme volatility? – I think so.
The fact is that people can no longer be made to keep their pension savings locked up until they reach old age. The entire pensions industry must work together to educate all pension savers, particularly those who are new to investing as a direct consequence of auto enrolment, to increase their clients’ resilience to wild market volatility.
If we don’t get that bit right then the entire AE project is at risk of the market.
From where should the solutions come?
I think the pension providers themselves are in the best position to provide creative, educational and cost-effective communications that ‘sell the sizzle’ of pensions and their unique advantages as a way to accumulate wealth for later life; and very specifically to educate on the ‘roller-coaster-ride’ nature of the markets. They have the expertise and the incentive to do so - the last thing a pension provider wants is to have en masse withdrawals due to market volatility.
The challenge is for them to do an effective job of engaging and educating within the wafer-thin profit margins that are characteristic of the AE market, and that takes me to the next question:
What can pension providers do to drive down operating costs?
Well, it has been clear that for some time that data transfer can become fast and efficient if the power of technology can be fully harnessed. And a pre-requisite for that is the widespread use of a data standard and I am of course referring here to PAPDIS, the Pensions and Payroll Data Interface Standard, which can be used ‘direct’ or through a proprietary data hub acting as an interface.
In summary, enrolment doesn’t mean engagement and we must not assume that the job of engaging and educating is anything less than absolutely vital for the success of the AE project and the success of our country’s pension system as a whole.
The market’s reaction to the referendum result is a reminder of how worrying the stock market can be to many investors particularly those new to investing. If pension providers fail to engage and educate their clients on the fundamentals of DC investing they are failing to govern a risk that’s just too serious to be ignored.
We’d welcome comments on this topic through our LinkedIn Group and in particular we’d be delighted to hear from advisers and providers that have a good story to tell when it comes to the job of engaging and educating on pensions.
See you in LinkedIn!