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Chris Curry: The four types of pension savers and how to engage them

Getting to the bottom of how people make saving choices is vital in securing better retirement outcomes

We know a lot about how many people are saving into pensions and how much they save. However, we know much less about why people make the saving decisions that they do.

We assume most employees auto-enrolled into a workplace pension do not really make any decisions about saving, other than deciding to do nothing different. But what about those who opt out or who increase contributions above the minimum level? And why do those people who stay at the minimum do so? Is it really just down to inertia?

A new report from Dr Hayley James, entitled Engagement Pathways in Workplace Pensions: An Overview of Pension Decision-Making, looks at the findings from a range of interviews with younger savers (aged 20 to 49) that uncover why people do what they do. The answers provide some potential policy lessons for the future. The report identifies four different groups of pension savers:

  • Threshold adults, who focus on establishing themselves. They need to be nudged into pension saving and supported to deal with the other complex challenges they face. They tend to rely on saving at minimum contribution levels and defaults;
  • Protectionist savers, who want to contribute more but without really thinking about it. They need default investment schemes and clear, simple explanations. They will often increase contributions to match those put in by an employer;
  • Sceptical speculators, who are unsure about pension savings. They need to feel reassured they can trust pensions, and that they can have a voice, to encourage engagement. They often opt out of pension saving – but not always. Some still stay at the default level even if they do not believe that they should, highlighting the power of inertia;
  • Market investors, who want to make active choices about their pensions. They need detailed but jargon-free information and tools to support them. They tend to have high levels of overall savings, but only invest in pensions once they have reached the limits of saving in other vehicles.

These groups engage with pensions in very different ways, highlighting the diversity that exists within the population, and that there is no one-size-fits-all policy, either in pension or engagement policy.

The research also shows how these groups are not fixed and people who start in one can evolve into another. In particular, those who start out as threshold adults relying on minimum contributions can transform into protectionist savers or – more problematic for pension saving – sceptical speculators.

Those in the sceptical speculator group are more likely to have trust issues with workplace pensions, which can create an additional barrier to saving.

However, market investors (the most engaged group) appear to have access to specific knowledge, social and economic capital that means it is unlikely everyone will eventually find their way into this segment.

It is also worth bearing in mind that none of these groups really represent the “ideal” saver and being a member of any does not necessarily mean a retirement outcome will be good or bad. What is important is understanding why these individuals behave as they do.

These different ways of thinking present challenges for the government, regulators and industry in building on the success of auto-enrolment.

All the time the minimum contribution level for auto-enrolment is lower than that which most people would need for an adequate retirement, ways will need to be found to engage and encourage pension saving. What this research highlights is that different messages, reassurances and interactions will be needed with different groups in order to be successful.

While auto-enrolment may be sufficient for threshold adults, protectionist savers respond to matching contributions as if they were recommendations, so messaging must be clear. Sceptical speculators need reassurance and information about pension saving in general, while market investors need online tools and calculators to support decision-making across multiple investment platforms.

Perhaps the greatest challenge lies in identifying when threshold adults can be converted into a more positive, proactive group. Notifications that can alert people to the benefits of pension saving when they reach “establishment” – for example, when they have children or purchase a house – might be one such innovation. However, even that can be difficult, as employers or workplace pension providers might not have reliable information as to when that may be likely to happen.

With an estimated 12 million people still not saving enough for an adequate retirement income, using this research to help build on the success of auto-enrolment is important. If insights such as these can be used to determine the right balance between inertia and engagement, and develop smart ways to engage the right people at the right time in the right way, many more will have a better later life.

Chris Curry is director of the Pensions Policy Institute

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