As an avid reader of the Weekend Essays, let me start by saying how honoured I am to be sharing with you my own thoughts, focusing on the sometimes mystifying world of pensions.
One of the reasons I always make the time to read the Weekend Essays is because they’re accessible and digestible- and the pension world could learn a lot from this.
Pensions in principle are simple. You add money to a pot over the duration of your working life, invest sensibly and then you can enjoy the fruits of your labour in your retirement.
But in reality, they’re far more complex than this. Despite the introduction of the Consumer Duty, pensions are still full of jargon and are often far from simple. How can this really result in widespread good customer outcomes?
Demystifying pensions is, in my opinion, a pivotal step towards increased engagement in retirement planning, as is an increased governmental focus on providing a basic level of financial education. For some, I think that even the term ‘pension’ deters people from active engagement.
Engaging younger generations is a particular challenge. Unlike saving for a mortgage or using finance to buy a car, pensions are something that’s easier to delay thinking about and planning for because they’re not immediately tangible.
It’s easy to forget that due to the complexity that pensions can often present, they remain an absolutely integral part of financial planning over a clients’ lifetime. There is a widespread and well documented problem that people are not saving enough for their retirement, so pensions should form a key component of everyday financial consciousness from the point that they join the workforce.
Of course, I appreciate at the moment with the cost of living crisis, that this simply may not be possible for many people who are understandably concentrating on the day to day.
I think the industry is making strides in terms of addressing the jargon that’s so inextricably weaved into our everyday. For those of us within the industry, the myriad of terms and definitions are second nature but can be intimidating to those starting their careers in pensions too.
There are helpful ‘jargon busters’ online, with guides and glossaries to try and aid customers with their understanding. The Consumer Duty also gave us all the opportunity to take stock of our literature and processes, and revise these to better support customers. However, the world of pensions remains busy with sometimes disorienting terminology.
In fact, it seems sometimes that pensions are rooted in a different language with the expectation that inexperienced clients will be somewhat fluent. The old cliché that ‘everyday is a school day’ rings true for those of us operating in the, sometimes arcane, world of pensions.
The challenge for the industry is that pensions are inherently complicated. There are so many scheme types, each carrying different rules, structures, options and investments. The rules sometimes lend themselves to subjectivity too, providing further differences for advisers and clients to contend with.
‘MPAA’, ‘LTA’, ‘UFPLS’ – these are all acronyms that make sense for advisers and firms, but for some clients these are just letters on a page. And it’s our job to translate these into understandable and digestible definitions for customers.
This is challenging with the prevalent advice gap, although the FCA is working to address this in conjunction with The Pensions Regulator as part of the Advice/Guidance boundary review.
If we are truly to unlock and demystify pensions, now is the time to do it. Changes such as the potential introduction of ‘guidance’ and also the pensions dashboards are key opportunities to engage people with their pensions. However, education and simplification for consumers is going to be critical to avoid bad outcomes if engagement does increase.
There is no magic solution to eradicate jargon from pensions. They can be complicated, but much of that is due to the world of opportunity that they present. I believe that financial products such as mortgages and annuities tend to be less complicated to understand, but they have a narrower purpose.
A pension scheme such as a SIPP can offer thousands of investment options, providing a great opportunity to build an investment strategy that adapts, evolves and endures. For this reason, the legislation, rules and structures behind pensions are understandably intricate.
The challenge for the industry is to ensure that customers can navigate terminology and rules, in order to achieve best outcomes.
Supporting consumers through the complexities and jargon associated with the UK pension system are advisers, acting as essential translators for consumers. The conduit between the complexities and unavoidable jargon, advisers enable complexity to be made simple.
But the responsibility doesn’t just lie with advisers and firms. I am a long proponent of better financial education in schools. Most financial products and events that people are likely to engage with – mortgages, life insurance, debt, the loss of a loved one – all require a basic level of understanding to navigate.
I don’t expect people to leave school and know what the tapered annual allowance is. However, having an understanding of the fundamentals would not only allow better navigation of some of the pension jargon, but also give them the tools to know how and where to find out about areas they don’t understand.
Jargon-buster guides are useful, but people need to know what they’re re looking for, to find the one most relevant to them. The same metric applies for advice too. People should be empowered with the knowledge to know when and how to seek financial advice. And this requires that basic level of financial education.
Navigating pensions can be an intimidating prospect for many people, and jargon is undoubtedly a key driver of this. You could understand an unadvised person taking one look at the new allowances stemming from the LTA abolishment and having no clue what that means or how they maximise the opportunity to save towards their retirement.
Absent of any wholesale changes to industry wide and embedded terminology, advisers are the key to unlocking the pension jargon puzzle.
