This story is brought to you by Pensions Insight
It's time to better educate people about longevity
Most people don’t realise how long they are likely to live, nor can they visualise how much money they’ll need to fund a comfortable retirement. Sara Benwell reports on how our collective short-sightedness could be tackled
Amid all the rejoicing about the successes of auto-enrolment so far, it’s easy to forget the massive elephant in the room – the fact that the majority of people aren’t saving enough for retirement.
And while getting more people signed up to a scheme in the first place can be considered a success, it counts for nothing if people are left dependent on a meagre state pension.
Unfortunately, the difficulty of ensuring that people have sufficient retirement income after they retire has been exacerbated at both ends of the process. In the accumulation phase the demise of defined benefit has shifted all the risks associated with pensions saving to members.
Meanwhile, the freedom and choice legislation has dropped the requirement to buy an annuity, leaving many people without a product that guarantees them a regular income for life.
It doesn’t help that most people severely underestimate their own life expectancy”
At the heart of both of these issues is longevity. As estimates continue to rise, the pots that people need to accumulate grow ever bigger and the money they do save has to last longer.
David Snowdon of SEI DC Master Trust says: “The world has moved on and communicating projected annuities and/or fund values at arbitrary retirement ages is now of little benefit to many ‘post-freedom and choice’ employees. Schemes now need to incorporate more personalised information about members’ expected longevity, and clearly signpost to them ‘this is how long your money might last’.”
It doesn’t help that most people severely underestimate their own life expectancy. An issue that is made worse by the common use of ‘average life expectancy’ in scheme communications.
So how should scheme managers and trustees talk to members about longevity? And how can we get people to face up to living longer and help them to save accordingly?
One place to look is behavioural psychology. If those responsible for schemes can understand why people struggle to comprehend their own longevity, they can amend their communications to overcome behavioural biases.
SCRAPPING AVERAGE LIFE EXPECTANCY
The first step for any pension scheme manager should be to abandon the concept of average life expectancy. Such figures are unhelpful, as many people then assume that is precisely how long they are likely to live.
Andrew Pennie, marketing director at Intelligent Pensions, says: “People don’t understand averages, I’m afraid… If we all work to the average, half of the population will run out of money in retirement.”
People don’t understand averages”
Scheme managers should present information that takes this into account so that members – who are naturally loss averse – start asking what they can do to avoid finding themselves in the half that runs out of money.
Longevity estimations change. For every additional year someone lives, their life expectancy goes up. So an average that might have been a useful guide one year will be out of date the next.
Pennie says this provides another communications option for scheme managers. “Every year you’re alive, your life expectancy gets longer, so if you’re a defined contribution scheme sending out a pension statement every year, you can start to educate people in that way.”
By making people aware that their life expectancy is a moveable feast you can better communicate that they need to look at the whole range of possibilities rather than just one figure.
UNDERSTANDING LONGEVITY CONTEXT
One of the reasons that people naturally underestimate their longevity is because of the context in which they learn how long people live.
It’s the deep-seated psychological problem with understanding age”
Oliver Payne, founder of behavioural insight and communications firm the Huntington Dynasty, explains: “One of the reasons that people misunderstand how long they’re going to live is not because they don’t understand the numbers, it’s because we tend to draw experience of longevity from the data points around us.
“I’m 43, my grandparents are dead, except for one who is in his 90s, so I grew up in the 1970s surrounded by people who were ‘old’ when they were in their 60s. That was my first experience of age… That‘s generally what’s going on around us, it’s the deep-seated psychological problem with understanding age.”
“Life expectancy has been rising by six hours a day since 1850, so industrialisation has increased the length of time that we live extraordinarily fast. There’s a huge gap between the world in which we live and our expectations.”
He argues that schemes need to understand this disconnect and communicate in a way that overcomes it. To do this, schemes need to use words and imagery that demonstrates ‘young’ 80- or 90-year-olds having a healthy and happy retirement.
HELPING MEMBERS CONNECT WITH THEIR FUTURE SELVES
Even if we can overcome the natural belief that some people live far beyond the average life expectancy, most people will still assume that they will not be one of them. In addition, people tend to prioritise their current selves over their future selves. For pensions, this can be catastrophic, as the earlier people start saving, the more chance they’ll have of building up enough money to last through an ever-lengthening retirement.
To overcome this, schemes need to find ways to help their members connect to their own future selves.
We are built for reasonably short and brutal lives”
Payne explains: “We have mechanised and manipulated and farmed and medicalised our way into a world that we no longer recognise. We are built for reasonably short and brutal lives and life expectancy is a lot longer than we expected. That’s the challenge, that’s where the gap is.
> Using loss aversion to bump up savings rates
Hannah Lewis, director of communications firm Behave London suggests that loss aversion could prove a useful motivator for getting people to save more.
“One behavioural technique you could try is to ask people questions which roll them back and forward in time, and prime them to feel regret as a consequence of the loss of the money they have not paid in the past. This invokes feelings of loss which are powerful motivators.
“Ask the following 4 questions:
- Did you know that increased life expectancy means that you could spend 30 years in retirement?
- You should save half your age as a percentage of your salary. I.e did you know that if you’re starting a pension at 30, you should save 15%?
- If you could go back in time and talk to your 20 year old self, who only has to save 10%, what would you say?
- Now let’s imaging you’re 40. You can go back in time today and talk to yourself. What would you say to yourself?
“Try asking this of all new joiners to a pension fund (personalised to their actual age) before they set their contribution rate!”
“Countering that means that we need to bring people into the future for two reasons; one because we live longer and two because we massively discount the future. From a psychological point of view, it’s a double whammy.”
One solution comes from the world of apps and gaming. Modern technology means that you can take a picture of someone in their 20s or 30s and age it artificially to show them what they might look like when they are 90. In this way schemes can use a mirror effect found by behavioural scientists to make pensions seem relevant to people who feel that retirement is a long way off.
Jerry Edmondson, a specialist in behavioural psychology at LikeMinds explains: “We’re not terribly good as human animals at imagining much further than three years in advance with any degree of certainty, any further than that just feels a bit too vague.
Tapping into that emotional dynamic is a really important, powerful way of making people feel differently about the pension scheme.”
“The key word in ‘future you’ is ‘you’. You are still going to be you and you’re still going to keep liking the things that you do, so walking the dog, going to the football, growing tomatoes in the back garden. Whatever you like to do now, the chances are extremely high that you’re still going to continue to like to do it in the future.
“If that requires money, tapping into that emotional dynamic and drawing a direct, clear link between you now and you then, is a really important, powerful way of making people feel differently about the pension scheme.”
Another example can be found in a Prudential campaign which ran in the US. Thousands of people across the country were asked to photograph their first day of retirement. This approach got people to think about what retirement might actually be like.
Payne says: “Schemes need to help whoever they are speaking to imagine themselves in the future. To take themselves to those days and talk about what life is like.
“We all think that we’ll have a luxurious breakfast, and it will be a lovely life and the sun will be shining and the kids will be running around, but actually if you don’t save enough money you won’t be doing those things so [the Prudential campaign] was quite a nice way of trying to bridge the discounting gap.”
KEEPING IT INTERESTING
Edmondson argues that we need to deal with the reputational issues in pensions. He says: “It boils down to appreciating the fact that the majority of people at the moment think that pensions and saving for retirement are complicated, scary and just dull, actually.
“Those thoughts make them feel confused, anxious and bored or apathetic. The issue is these feelings are preventing people from engaging with saving for retirement.”
The majority of people think that pensions are complicated, scary and just dull, actually
It helps, he argues, to stop thinking about ‘members’ and ‘employees’ and to start thinking about people.
He says: “I have it on good authority that members and employees are people, too. If you put that at the centre of your communications strategy – just thinking about your members and your employees as people and treating them accordingly, applying the kind of marketing or advertising dynamics that communications agencies have done since the dawn of time in that kind of context – then things start to work better.”
CHOICES AT RETIREMENT
Even if you manage to persuade an individual to save an adequate pension pot for retirement, the battle is not over yet. Understanding longevity is particularly important at the point of retirement, when members have to choose between an annuity or a drawdown product.
There are lots of free tools available, such as the Office for National Statistics’ longevity calculator that can help schemes communicate with members.
Drawdown will not last forever”
Snowdon says: “Members hitting their 40s and 50s who can start to at least consider a time without work will require access to flexible online modellers. These can consider a wide range of scenarios and demonstrate the benefits payable from drawdown and/or annuities over the individual’s ‘expected’ post-retirement lifetime.”
But Pennie is keen to stress that members will need to have an evolving decumulation strategy.
He says: “The key thing for most people is that drawdown will not last forever, drawdown will get progressively less suitable the older you get. And therefore people need to be mindful that they might need to come out of drawdown to secure their income through an annuity later on in life.”