I’ll admit it: I have strong opinions about pensions and investment. I find it particularly vexing when anyone uses the word ‘saving’ while talking about pensions. That’s why the first blog I wrote addresses this very issue.
Research released by Nest Corporation today reinforces why it is so important the pensions industry does its utmost to take a more intelligent approach. It’s time to explain why it’s impossible to save for a pension and that a decent retirement income cannot be achieved without investing.
The report said: “While saving in a bank is considered safe, investing is dismissed as something rich people do with money they can afford to lose. Pensions are seen as a third way between saving and investing – expected to provide higher returns than a savings account but with none of the ups and downs of investing.”
Those two sentences present plenty of challenges for trustees, employers and investment managers. The first illustrates the huge educational gap that needs to be tackled – investing is not just for rich people, it’s for everyone who wants to have a decent retirement income.
The second sentence shows just deep risk aversion runs and how difficult it is to overcome the emotional reaction to short-term equity volatility in order to make the most of the long-term benefits of this asset class.
The report also says: “Most people don’t perceive any difference between volatility and risk. They’re seen as synonymous with the potential for absolute loss and trigger emotions like anger and confusion. As a result, consumers are uncomfortable exposing their retirement savings to any sort of investment risk.”
And it adds: “The desire for stability in a pension is so strong that they’d rather face a lower, more certain outcome than go through ups and downs on the way to higher returns.”
Taken together, those research findings paint a clear road map for investment managers currently pondering what the next generation of investment products should look like: some form of volatility cap, even if the costs reduces returns, would be welcomed by those saving for retirement.
The Nest report is hot on the heels of a report by the Economist Intelligence Unit looking at the future of the UK investment management industry. Only a few weeks ago I wrote a blog about a similar report from KPMG.
All three reports show the investment management industry faces a number of significant challenges but one of the most important is how fund managers need to communicate more effectively with those saving for their pension as the industry becomes more consumer focused.
As the UK’s pensions industry moves from one that provides retirement income through a defined contribution rather than a defined benefit model, it will have to learn how to talk clearly to consumers rather than just industry insiders.
That will require a radical new approach to all aspects of communication from the time a member joins a scheme to the day they retire. It can be argued that leaving pensions communication until employment age is too late: financial education should begin at school.