• Stuart Fowler

Learning from the least knowledgeable

We were very impressed by a new paper, Improving consumer confidence in saving for retirement, from NEST, the public-sector provider of auto-enrolment pensions, about customer attitudes in its target market based on both surveys and focus groups. NEST’s market is the polar opposite of ours but it would be foolish to assume that knowledge of and interest in financial matters, let alone numeracy, develop naturally with a bigger balance sheet; or that quirks of human behaviour well-evidenced in academic research don’t cross socio-economic boundaries. Besides, we serve in most cases not a single individual but also their spouses and perhaps their children. Communication is just as much our challenge – both in winning clients and in delivering what they want.

NEST is in a good source of insights for FD and any high-end wealth-management firm (and indeed its clients) for a number of reasons.

  • It needed to address the communication challenges of educating and supporting the least engaged and also the least informed.

  • It has an impressive record of using consumer research to come up with evidence-based solutions.

  • Without necessarily cracking the communications challenge, it has done a lot to deliver an investment service without jargon or condescension.

  • Its scope is pensions but many of its insights are relevant to all individual financial goals requiring savings and investments.

There are two levels of conclusions in the paper that we think we in the industry can usefully measure ourselves by:

  • What the NEST research tells us about what people want

  • What NEST thinks are proving to be good solutions

What people want

This report draws on a number of research projects mainly (but not exclusively) focusing on consumers with similar demographic characteristics to the ‘unpensioned’, so biased to lower incomes and younger people but also (about half its sample) people who have had pensions and been put off. What they know about pensions is therefore not representative. One has to hope so, as misunderstandings are immense and harmful. The lowest levels of numeracy exhibited may also be skewed, if lack of capability partly explains why this target audience has rejected pensions. In a very unscientific way we plan to ignore these biased observations as we try to pick out those we think are so widely applicable as to be relevant even at the high end of the market.


‘Stories of people losing all their money endure in the collective public memory. In our focus groups people still referred to Robert Maxwell and his role in the collapse of the Mirror Group pension scheme. It seems that for many consumers ‘Maxwell’ is the biggest brand in pensions. People also tell stories of relatives or acquaintances that ‘lost’ money in a company pension or ended up with a disappointing outcome after years of saving….As well as eroding consumer confidence, these stories leave people confused as to how pensions work. Poor investment performance is associated with embezzlement, and market downturns are blamed on bad fund management.’

To be fair, this is as depressing as the research findings get, and perhaps the least representative. As professionals, we tend to think people are mainly worried about markets and find it hard to believe they may not take for granted the basic honesty and durability of industry structures. We may not appreciate, as the NEST report implies, how much damage to this essential ‘general trust’ was done by the financial crisis, not because of the losses it inflicted so much as by the popular perception it was caused by so-called professionals who were merely gambling with other people’s money. There is no hint, incidentally, in NEST’s report that lack of trust is being used as a convenient excuse to cover a quite independent aversion to saving, which is what many in the industry suspect.

‘Clearly, trust can’t be built through words alone, it needs to be earned through consistent action. Given that consumers are generally unable to say what’s different about the approach of one workplace pension to that of another, they don’t really differentiate between one provider and the next. Therefore a step change is required in the perception of the sector altogether. Secondary evidence suggests that trustworthiness can be demonstrated through communicating:

  • benevolence, by demonstrating shared values

  • integrity, by demonstrating honesty and the intention of doing the right thing

  • ability, by demonstrating expertise and a consistent track record.’

In other words, it’s not what providers say about themselves but what they convey through their relationship with the customer. Of course. But the idea that customers want to be able to rely on all providers without needing to discriminate perhaps points to their unwillingness to make any effort to discriminate. As a firm that has sought to differentiate itself from other providers, and convey it through business attributes that carry implications about benevolence, integrity and ability, we very much depend on that effort being made and are acutely conscious of its frequent absence even in our target market.

Reassurance not knowledge

More knowledge, say NEST, is not the answer to improving confidence and may even make people aware of unappealing aspects of investment they were previously blissfully ignorant of. ‘Members don’t have an appetite to become semi-experts. They want instead to be reassured that the people responsible for growing their retirement savings are doing so responsibly and sympathetically to their concerns.’

This should set alarm bells ringing. The fact that many people are nursing fundamental misunderstandings about retirement provision and investment in general suggests educational support is necessary to prevent poor decisions being made. But supporting better decisions is not just a requirement of the bottom end of the market. Informing people’s choices does not require them to be semi-expert and should ideally avoid specific technical knowledge (and language), as NEST itself argues. But it does require spelling them out, in terms non-experts can relate to, even if they come across as unpleasant realities. An advantage when dealing with pensions is that the key choices are supported by information about amounts put in and amounts taken out, as levels of future spending outcomes in real terms, or buying power. We find anyone can relate to that. And relate to it they must.

Certainty of avoiding loss

As a public-sector organisation, NEST has a clear advantage in persuading people to trust it even if they would not trust private companies. But what was also interesting was that people who have welcomed or accepted auto-enrolment as a spur to doing something about retirement provision are not necessarily any more willing to believe that investing money is the appropriate way to fund retirement. Trust in markets clearly is also a problem.

On this point, NEST’s research is entirely consistent with behavioural theories. The fact that people assign a higher value to losses than to gains of equivalent amounts is well documented. More interesting, NEST research found particular importance is attached to dropping below the amount put in. ‘This research also identified that losses that eat into contributions are considered to be completely unacceptable. Loss of previous gains is less objectionable but only relatively so. There’s a sense of relief that at least the contributions have not been lost.’ The probability of this arising is greater in the early stages (one reason why NEST’s default fund holds bonds at the beginning as well as the end of the savings journey) but it is reduced significantly by HMRC also contributing at the basic rate of tax.

The research raises the perennial issue of whether volatility, the source of interim loss, is an appropriate measure of risk. ‘It’s a struggle for consumers to accept that volatility over the lifetime of their pension won’t necessarily mean an outcome of less than they contributed. They see volatility as inextricably linked with risk, and risk is seen as synonymous with loss. While experts will recognise both an upside and a downside to investment risk, for consumers the downside of investment risk dominates. Even if they understand that some investments present more risk than others, the presence of any risk opens up the possibility of losing what was invested and is therefore unacceptable.’

A corollary of this is the finding that the risk warnings the FCA require providers to include in product literature probably do more harm than good and certainly more harm than we in the industry might otherwise assume, regarding them as trite and (probably) ignored.

It is well-understood that behavioural responses to interim loss lead to poor decisions, whether in terms of people stopping contributions (including opting out of auto-enrolled pension schemes) or selling investments at low prices to avoid further interim loss. It happens at every level of household wealth. NEST understands that a vital objective of communication is to seek to modify this behaviour. In its target market, it is not optimistic.

As NEST points out, behaviour based on interim loss, whatever it is compared with, typically ignore inflation. In this respect, stock market investment reflects the same ‘money illusion’ as property, which during periods of high inflation rarely ever showed a loss in nominal terms (even though real prices, adjusted for general price inflation, fell peak to trough by as much as 30%). This has contributed to the popular misunderstanding that bricks and mortar are ‘safe’ investments. But so, presumably, has the fact that property prices are not ‘marked to market’ daily and so ‘true’ volatility (assuming a much higher level of actual exchange, more comparable with very liquid stock market investments) is being hidden.


This ugly word (I’m sure its not in NEST’s client-facing lexicon) refers to the documented behavioural bias of focusing on (and assigning an unrealistic chance to) worst-case outcomes. ‘There’s a perception that when investment risk erodes contributed capital, it demolishes it.’ But the focus is perhaps rational when you consider the consequences of worst-case outcomes. In our view, it requires a complete distribution of possible outcomes, and full costing of alternative routes to different sets of outcomes, to make informed choices and avoid poor decisions. In this context, the worst-case outcomes are effectively a ‘stress test’ of the plan.


Getting this across relies on communication, about which NEST has some ideas. But generally events with very low probability but appalling consequences are best met by insurance. If insurance, or guarantees, could be brought into pension products, but only to protect against ‘tail risk’ in nominal terms, it might be possible to modify behaviour caused by catastrophising, money illusion and obsession with loss of contributions. Indeed, the Government might ask itself whether providing low-cost (and contingent) catastrophe insurance would have better effects on pension provision that tax relief. It’s patronising to the financially illiterate but if it works, why not? A precedent has been set already with the Right to Buy policy, and with far less justification.

NEST explored guarantees with focus groups but we’re not sure the illustrations, though costed, were in fact consistent with the idea above of a limited safety net with a very low probability of being required and therefore a very low imputed insurance cost. The idea of trading off tax relief against guarantees is also a different subject for analysis.

‘What will I get in the end?’

Through in-depth interviews NEST found first-time potential pension savers almost all wanted to know the same things:

  • What happens to my money?

  • Is my money safe?

  • What will I get in the end?

Whilst it is possible for communication strategy to address the first two, projecting outcomes is a different order task, requiring technical integrity of methods used to calculate as well as clear communication of the outputs. This is something we are very familiar with, as financial modellers conveying outputs of models with clients both when planning a savings journey and when reporting the journey progress.

To us, this is a simple choice between deterministic, linear methods (such as the growth illustrations required by the FCA when selling packaged products) and stochastic or probabilistic methods that calculate a distribution of all possible outcomes, with associated chances. NEST also explored with focus groups communication of both deterministic and stochastic information about outcomes (both capital amounts at retirement age and equivalent levels of annuity income), so a useful test in one target market of what we claim to be the best. NEST found strengths and weaknesses on both sides but an important conclusion emerged nonetheless.

‘Deterministic projections, though more straightforward from a presentational view, aren’t easier for people to understand. The opposite is true in the sense that they’re easier to misunderstand. People certainly found deterministic projections easier to look at and it took them less time to digest the information that was being relayed. However, it was either taken to be a promise or as so indicative as to be meaningless. Earlier research, which explored this area in far less detail, suggested that consumers generally interpreted the outcome communicated by the deterministic projection to be just as likely as a very poor, and improbable, outcome. This research confirmed that this was the case for people with previous experience of pensions, who account for about half of the unpensioned. Some consumers, especially those new to pensions, assumed that the deterministic projection was telling them what they’d get. When they realised that this outcome wasn’t certain, they shared the emotive reaction of those who already knew.

In contrast, probabilistic projections are considered to be a lot more difficult to digest. But once people have taken in the information that there are a range of possible outcomes and that some outcomes are more likely than others, their understanding was much improved. Probabilistic projections were therefore seen as helpful for many in our focus groups.’

If the effort pays dividends, the challenge is to work out what encourages the effort.

What works best

NEST has put in the work to try to deal with the challenges in its target market of reluctant or disengaged savers. Much follows logically from the account above of the problems it has to deal with and from its perception of what conveys (rather than simply claiming) trust. But this is not to trivialise its suggestions. I’ve summarised these as follows.

Be open and realistic. This sounds obvious but it comes easier to NEST than to private firms who are likely to feel they lack commercial incentives (in other words, marketing rewards) for disabusing, rather than taking advantage of, their superior information.

Speak their language. Arguably NEST have gone too far in replacing rather than defining technical terms that are widely used in the industry. Jargon is jargon for good reasons. For example, an ‘annuity’ is a specific means of delivering a pension income and replacing it with something much more general is likely to cause confusion. In our experience, the game changer is not so much the choice of words as the decision to focus on outcomes as the main basis of conversations, as this inherently invites a language more likely to be understood.

Be a safe pair of hands. This is where the other two things people want to know count: taking the trouble to explain what happens to their money and what makes the whole system safe. But it is also about showing you care about the things they care about and are therefore entirely on their side, as if in their shoes.

Show you have a plan. This is not so much a personal plan for each investor, as customisation in the mass market is limited and in NEST’s case is dealt with by target date funds that are matched to the age of the investor. To NEST it follows from understanding what they care about and therefore means emphasising how you manage risk rather than how you expect to generate good returns. It’s not the way round most firms have it.

Use simplifying structures. My words, but it follows from the idea that the explanation of what happens to their money (and why) does not have to be complicated. NEST thinks of target date funds as a simplifying structure. It is indeed a simple way to demonstrate it’s personal, not just a faceless pool. But for us, this is also an example of how the best structures follow from adopting goal-based investment because that is what makes it both intuitive and personal.

Provide and support choices. NEST think people want the freedom to adapt their approach to the journey, during the journey. They want control. In fact, it is implausible to generate any sense of responsibility without giving control so if you think the way to encourage more realistic pension provision is to foster more personal responsibility you also have to allow more control. Not all policy makers understand this.

#autoenrolment #investmentprocess #pensions #risk #targetdatefunds


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