The pensions landscape is constantly evolving. As a result, many of tomorrow’s retirees will bear more risk before, at and during retirement than previous generations. And they will have to make a lot more choices along the way to help determine how they will support themselves when they stop working.
It is no secret many people do not have the necessary capability or support to make the best choices about long-term saving. With this in mind, it is important that help and safety nets exist for those who find navigating such decisions challenging.
Behavioural nudges, such as automatic enrolment, are increasingly seen as a means of helping people to achieve better outcomes here. But while effective if used appropriately, nudges alone are not sufficient to help everyone realise their full potential benefit from long-term saving.
For example, even if a median earning 22-year-old man was automatically enrolled today, and stayed enrolled at the minimum contribution level until reaching age 68, he would only have around a one in four chance of an adequate retirement income.
It is clear more needs to be done. Recent research we have undertaken highlights how behavioural interventions can help people engage with financial decisions.
Intervention is not necessarily suitable for everybody all of the time. How well engagement techniques work varies between people depending on the time they are applied, the way they are framed and the individual characteristics of the group the interventions are aimed at.
For instance, interventions are most effective when they are applied during teachable moments. For a moment to be “teachable”, it must be a time when the intervention is relevant to someone’s current circumstances, relates specifically to their goals and allows people to follow on with simple, practical actions.
Teachable moments vary between people by age and circumstances but generally occur during key transitions, such as moving house, getting a job or starting a family, or during other times when people are making financial decisions such as buying other financial products.
Interventions are also most effective when they are personalised, taking into account the specific circumstance of people. This can include how much the individual already knows and understands, income levels, age, gender and even cultural attitudes. It is not a case of one size fits all.
There is some benefit from very broad campaigns, and people of all ages are susceptible to media (both TV and social media) campaigns, but these are generally much better suited to raising awareness rather than prompting action. There is little opportunity for the query and clarification dialogue that can help to drive changes in behaviour.
It is also true that there are times during people’s lives in which their circumstances render them less able to respond well to interventions. It is less effective to attempt to motivate people suffering severe deprivation or are unable to make active decisions. For example, people with low levels of capability may experience worse outcomes if they are forced into making an active decision, unless educational support for decisions are included in the intervention.
During these times, other policy levers may be the most effective way of ensuring people have good financial outcomes. Because of the importance of saving into a pension early and consistently in order to accrue sufficient pension savings, it is not generally in the best interests of non-engaged people to defer saving in a pension until they have achieved a higher level of financial capability. So defaults or compulsion to contribute a certain amount to a pension will particularly benefit the non-engaged.
Which brings us full circle. Behavioural nudges and consumer engagement are often put forward as alternative ways to helping people save more for later life. In reality, though, they are complementary, and in order to best help everybody have better retirements, a combination of both will be required.
Chris Curry is director of the Pensions Policy Institute