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New report examines barriers to consumer engagement with pensions

Out-Law News | 14 Feb 2017 | 10:18 am | 2 min. read

A better understanding of behavioural economics could help to drive up the amounts that individuals are saving for their retirement, according to the Pensions Policy Institute (PPI).

The government must consider "a range of policy levers" beyond automatically enrolling individuals into workplace pension schemes if it is to address insufficient saving, according to the PPI's new report, which was sponsored by Pinsent Masons, the law firm behind Out-Law.com. The report, which is the first of three to address consumer engagement and pensions, recommends that the government examine various behavioural techniques as part of its review of the automatic enrolment policy.

PPI policy researcher Lauren Wilkinson said that auto-enrolment had "complicated" consumer engagement around pensions.

"People who are defaulted into saving are by definition less engaged than those who choose to save voluntarily, and this can lead to insufficient engagement with other aspects of the decision-making process, such as decisions about contribution amounts," she said.

"With the automatic enrolment review focussing on consumer engagement as a key theme, it is important that policy takes account of the way that individuals naturally behave when considering how to further improve retirement outcomes. Using behavioural techniques in a pension environment is not straightforward, but if used alongside a range of other policy levers there is evidence to suggest that behavioural techniques can improve decision-making and outcomes," she said.

Automatic enrolment began for the largest employers in October 2012, and is expected to lead to around 10 million people newly saving, or saving more, towards their retirement by 2018. The rules require employers to automatically enrol their workers into a defined contribution (DC) pension scheme which meets certain minimum requirements, and to make contributions towards the pensions of workers that do not opt out of the scheme once enrolled.

The government is currently reviewing the policy to ensure that it is working as intended, and that it is meeting the needs of individual savers. Among the topics being considered by the review are whether, and if so how, to encourage those that do not qualify for automatic enrolment to save for their retirement; and how best to deal with the self-employed and those working in multiple jobs who do not meet the earnings threshold for automatic enrolment in any single job.

The PPI report examines the various behavioural factors that can influence people's investment and decision-making. For example, 'inertia' or 'status quo bias' can discouraging them from making decisions in the first place; while savers may rely too heavily on past, rather than future, fund performance and risk factors or rely on default funds rather than their own knowledge in order to minimise their exposure to risk. Too much choice and 'information overload' can also prevent people from making the best investment decisions, according to the report.

The report concludes that a mixture of policy levers is essential to deliver positive outcomes for the greatest number of people, given the complexity of the pensions environment and the different understanding levels of different individuals. While behavioural intervention will encourage savers to make decisions which result in better financial outcomes for those individuals, compulsion and defaults will continue to be essential for those who do not make active choices while consumer protection measures and 'safety nets' will be needed to protect people from fraud and poor governance.

Pensions expert Carolyn Saunders of Pinsent Masons said that the way in which people were accessing and using their savings in retirement was already changing as an inevitable response to the pension freedoms.

"There is uncertainty about the exact direction that changes will take as there are many factors that will influence this," she said. "Not least, the behaviour of individuals and the choices they make will affect the aggregate value of savings and the retirement income products on offer."