Savers ‘light years’ away from becoming investors in DC – NEST
Savers within the defined contribution (DC) space in the UK market do not realise the inherent investment risk within their pensions, research has shown.
In a comprehensive report, the National Employment Savings Trust (NEST), the government-backed auto-enrolment vehicle, said a combination of consumers’ lack of trust in finance and identification as savers, not investors, was a concern for the industry.
Within the master trust, members can access a default investment strategy alongside a range of funds catering for different risk tolerances and ESG factors.
However, NEST identified a “profound information asymmetry” leading members to distance themselves from pensions, assuming they have no impact on the performance on their fund.
It also found DC members fail to separate volatility and risk as concepts, leading to a preference towards savers wanting a lower, more certain outcome rather than volatility.
Paul Todd, assistance investment director at NEST, said members did not see themselves as investors, and that the very concept of investment was suspect.
“When thinking about retirement income, it is conservative,” he said. “So a pension seems light-years away from stock markets, volatility and risk.”
However, the research also found that, while volatility was negative, guarantees were not viewed positively, and respondents felt that certainty should not be provided at additional cost.
The report highlighted that the perception of guarantees was not necessarily tied up with returns and capital protection.
Rather, many respondents referred to them as a “scam”, where providers were not confident about protecting members’ pensions.
Todd said individual investors should be at the heart of product design, rather than the industry assuming it knows best.
“There has been a tendency that, if we shout louder, then the consumer will understand it – it is the wrong way of looking at this,” he said.
“A lot of this needs to be bringing consumers into a dialogue about the development of products.
“The concept of investment at the moment is a black box for savers, where they see money go in and are not sure what happens.
“We need to find a way of making equities and bonds more tangible.”
The research showed investors wanted products that met concerns about volatility and extreme losses, but had a plan for managing these issues.
“A lot of people said they would just like a cash product, which is a concern for the industry, as they do not see equities as a suitable way to secure a retirement income,” Todd said.
“We need to sell the concept that risk is a good thing, [though] the word has a negative concept, and at least demonstrate we have a plan for when things go wrong.”