It’s widely known that people are not saving enough for retirement. And when they reach retirement, they are struggling to make smart financial decisions.
But how can we expect savers to engage more, save more and make informed decisions about investment strategies when the Financial Conduct Authority's most recent Financial Lives Survey shows that only 8 per cent of adults receive financial advice, and more than a third of non-retired adults have never thought about how they will manage financially in retirement.
This is a particularly worrying problem for generation DC (those with the more modern defined contribution pension) who, unlike those with defined benefit pensions, need to make active decisions about how to manage their pension pots in retirement.
Meanwhile, in the background, inflation is eroding returns on our cash savings.
What it all boils down to is that customers need more support. And one crucial way in which people could get more support is through new forms of advice and guidance.
That is why the Association of British Insurers was extremely pleased to see the government and FCA propose a targeted support regime as part of their ongoing advice guidance boundary review.
This regime would enable firms to use limited personal information about a customer and their circumstances to provide better support.
Firms would first identify whether a customer falls within a target market and then make suggestions to the customer that align with the needs, characteristics and objectives of that target market, while acknowledging that the particular customer may have individual needs that have not been identified.
And we have good news for consumers, the industry and the regulator alike: targeted support works.
We know this because the proposed targeted support regime is very similar to one that the ABI has been supportive of for a long time: personalised guidance.
This is where providers can use information about their customers to tailor communications and product journeys to help those customers achieve better outcomes.
Under current rules, providers cannot test the effectiveness of personalised guidance (or targeted support) because doing so would cross the boundary between what counts as regulated financial advice, which involves a personal recommendation, and guidance, which involves the provision of generic, factual information about the options available to a consumer.
To get around this hurdle, we partnered with Thinks Insight & Strategy’s behavioural team to test the impact of personalised guidance on decision-making in an experimental environment.
The results prove our hypothesis that personalised guidance can be very effective in helping customers make better decisions, insofar that it suggests a course of action.
Given the similarities, we think these findings provide useful lessons (and bode extremely well) for the development of a targeted support regime.
In our experiment where participants needed to choose how much to withdraw from a hypothetical pension pot, 14 per cent of participants made the right choice when provided with generic guidance on income tax implications.
