Behavioural economics can boost engagement and retirement incomes
Research suggests the key to helping people make good retirement choices is to frame their options correctly, reports Jenna Gadhavi
The pensions freedoms announced in April 2014 caused a cataclysmic shift in the DC landscape as we knew it. As a result, future retirees will bear more risk at and during retirement than any generation before, and many savers are unequipped to make the decisions needed to maximise their prospects for good retirement outcomes.
As the pension system evolves, future pensioners face increasingly complex judgements about retirement, from decisions about saving, to how to access their pots upon and during retirement. The way that people approach these decisions can have a significant impact their retirement income.
In a bid to understand this theme further, the Pensions Policy Institute (PPI) has just published a report that explores behavioural economic theory, and the how the barriers and biases it identifies can inhibit decision making and outcomes in pensions. The report, entitled Consumer engagement: barriers and biases and sponsored by Pinsent Masons is the first in a series of three looking at engagement in pension provision.
Commenting on the report, Carolyn Saunders, head of pensions and long-term savings at Pinsent Masons says: “More savers with greater flexibility inevitably means that the way in which people access and use savings in retirement will change.
It is important that policy takes account of the way that individuals naturally behave…
“There is uncertainty about the exact direction that changes will take as there are many factors that will influence this. 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.”
Lauren Wilkinson, policy researcher at the PPI adds: “With the automatic enrolment review focusing 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.”
The next two reports in the Consumer Engagement series will explore the ways in which people engage currently, and how behavioural interventions might work alongside other policy levers to help people to achieve better outcomes from pensions. They will also look at policies designed to promote engagement internationally and draw out lessons for promoting better engagement in the UK.