The government has been urged to ban pension switching incentives, after research from People’s Partnership and the Behavioural Insights Team (BIT) found that cash incentive offers make savers more likely to ignore the fine print and switch their pension to a worse option.

The survey, which collected views from more than 5,500 pension savers, found that participants were 20 per cent more likely to say that they would transfer their pension once seeing a cashback offer of £100.

This was despite analysis suggesting that higher fees charged by the new pension would leave them more than £1,000 worse off after just five years.

The research also found that there may be a degree of fee insensitivity, as over one-quarter (26 per cent) of participants in the study said they would be likely to transfer their pension even without any incentive, simply based on seeing an offer to transfer.

While the cash incentives were offered through adverts and personal referrals, the results suggested that the mode in which an offer was communicated also did not have an impact on the likelihood of transferring.

However, those who were offered a cash incentive were 20 per cent less likely to evaluate the offer by looking at the finer details of the terms in the offer, via the FAQs, which meant they were unable to judge what they were being offered.

People offered a cash incentive were also less likely to understand the transfer offer correctly, which the report highlighted as evidence that the cashback incentive may be exerting a disproportionate influence on people’s decisions to transfer.

This prompted concerns that this behavioural bias may subvert the effectiveness of safeguards such as providing consumers with the relevant information in an easy-to-understand format.

The survey also builds on previous research from People’s Partnership, which found that nearly three quarters (72 per cent) of people who had made a non-advised pension transfer didn’t know exactly what charges they were paying on their new pension or what they were charged for their old pension.

In light of the findings, People’s Partnership argued that the pensions industry needs to provide simple, easy to understand information for members when transferring.

It also called for pension switching incentives to be banned, given the "clear" role they play in inhibiting people’s likelihood of reading the small print, arguing that these "critical details" make thousands of pounds of difference to a pension at retirement.

People’s Partnership CEO, Patrick Heath-Lay, highlighted the latest research as evidence that cash incentives bias the pension transfer process in ways that are "often harmful", acting as a barrier against people considering what is on offer and whether it is value for money.

He continued: "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 Financial Conduct Authority's (FCA) Consumer Duty.

“This new research from BIT further underlines how vulnerable people are when transferring their pensions without advice. It is clear consumers don’t understand the key elements of value within a pension and the industry clearly isn’t doing enough to make the transfer process transparent and comparable.

“We support moves by government and regulators to make value for money in pensions more transparent and comparable to the consumer.

"As it stands, the transfer market is too stacked in favour of pension providers, rather than in the interests of the consumer. This urgently needs to change.”

Adding to this, BIT UK financial behaviour team, Ruth Persian, said: “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."

Incentives are already expected to be a core focus of the Department for Work and Pensions' ongoing work to improve the pension transfer regulations, after the DWP heard evidence that the incentives flag is incorrectly blocking transfers due to the different interpretation of the flag by some providers.

The concerns were raised after PensionBee accused several pension providers of abusing pension transfer legislation, which was introduced in November 2021 and gave trustees the power to flag and block transfers that showed signs of a potential scam.

However, many of the providers in question suggested that PensionBee’s marketing initiatives at the time, which has since concluded, fall within the meaning of an ‘incentive’ under the regulations, which state that any transfer that has been incentivised cannot proceed as a statutory transfer.

PensionBee's current programme offers customers a £100 pension contribution for every friend they refer to PensionBee, and there is no financial incentive for the friend to transfer to PensionBee.

Commenting on latest research, PensionBee CEO, Romi Savova, stated: “The landscape of pension transfers is undeniably complex, with transparency and comparability remaining elusive goals.

"However, commonly used referral-like programs, which are offered by many of the largest pension providers in the country, are not the root cause of poor outcomes for pension transfers.

"On several occasions, the Department for Work and Pensions has clarified the intention of this legislation. The former Pension Minister even set out the definition of an incentive as a 'too good to be true offer' such as free pension reviews or early access to pension cash.

"Efforts to put consumers at the heart of pensions should instead focus on ensuring fairness and transparency through clear jargon-free communication, fostering the development of straightforward products that make consumers want to stay with their provider and implementing legislative measures such as the 10-day pension switch guarantee to streamline the transfer process.”

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