Government urged to ban pension switching incentives

Research shows people are likely to take cash incentives to switch pensions even if it means a worse pension deal in the long term.

Pensioner's hands holding wallet open


Workplace pension provider People’s Partnership commissioned the Behavioural Insights Team to conduct an online experiment with more than 5,500 people who hold a UK pension to test how they would respond to invitations to transfer their pension both with and without an incentive. They found that participants were 20% more likely to say that they would transfer their pension once seeing a cashback offer of just £100. That is despite the fact that higher fees charged by the new pension would have left them more than £1,000 worse off after just five years.

The cash incentives were offered through adverts and personal referrals, and those who saw them were 20% 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, says People’s Partnership.

It believes the pensions industry needs to provide simple, easy to understand information for members when transferring and is calling for pension switching incentives to be banned because they inhibit people’s likelihood of reading the small print.

Patrick Heath-Lay, CEO, People’s Partnership, 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.

“Healthy competition between pension providers should be based on the quality of pension products, not marketing tricks that exploit flaws in the way people think. We believe this research highlights practices that are contrary to the FCA’s Consumer Duty.”

Ruth Persian, head of BIT UK’s Financial Behaviour Team, added: “Pensions are complex and often confusing. Our experiment shows that ads promoting 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.”

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