The government released another Breaking Blue research report yesterday, to a huge media storm. #exaggeration
The frenzy, in the finance press at least, happened because on the back of our research, the government will now force companies to disclose pension transaction costs or pay a £50,000 fine.
You’ll want to read our full report of course – which is here.
But I know you’re busy, so I’ll summarise the summary for you:
If you’ve been automatically enrolled into a pension, you can relax knowing you’ll be paying low fees.
BUT more than 2 million members of older pension schemes are still paying excessively high charges that are eroding the value of their pension.
Almost no schemes can report on complex ‘transaction costs’ that are incurred when a pension buys or sells underlying shares.
As a result the government is acting to fix Point 3. Not point 2. Point 3.
The news was lauded in the specialist press, the Financial Times, and even the Daily Mail (at least once they’d finished naming and shaming all the universities who don’t support Brexit i.e. all the universities).
More transparency! What’s not to like?
But look a bit deeper and some key industry figures and the ex-Pensions Minister expressed some reservations…
The points above are quite important. Transaction costs aren’t just hidden and complex, they’re unpredictable, very difficult to express in a meaningful way, and can only be reported after the event.
I can’t really understand them.
From a behavioural economics perspective, now that everyone is saving for a pension, we need people to save more, so we must make it as easy and desirable as possible.
The problem with disclosing transaction costs, is that the info is hard to understand, not related to any tangible outcome, and out of the control of most pension savers (unless they’re investment experts).
So while the standard economic model says it must be good for us to have this transparency, behavioural economics tells us it might in fact have the opposite impact and perhaps even turn people off pensions.
If presented correctly it could work – it would be interesting to do some research into the impact that different ways of providing this information might have on different groups of savers.
But in the meantime I’ll be keeping an eager eye out to see whether behavioural economics does win out over traditional economic theory.