While AE can be seen as a great success, with only 10% opted out, increased contributions which come in from next year, will demand a different strategy altogether. Until now, inertia has been the order of the day, but the government’s nudge department, together with the industry are going to have to work together to come up with some new solutions if the number of opt-outs is not to rise. It is essential that savers can see the benefits of saving into a pension, why tax advantages are so beneficial and how dire the effects of not saving adequately can be. New tactics are now required to shock the population out of complacency.
Many in the industry are already using insights from behavioural economics to better understand their markets. It is unfortunate that the most successful one to date – inertia – is also the one that doesn’t actually require any work from the individual. The industry needs to find solutions for many of the barriers to effective pension saving. These include information overload, present bias (where people postpone making investment decisions) and risk aversion, where people opt for the default fund, believing it to be less risky than relying on their own knowledge. Sadly, until we act, inertia will remain the default behaviour for many people.
Technology will be key to developing effective solutions. Mass education programmes versus very targeted educational initiatives – financial services firms that have the reach and technological capability to do both will be well placed to succeed.
There is no getting away from the fact that trust and building trust is crucial. This sows the seeds for better and more meaningful interactions with customers, which can ultimately lead to better insight and information. Firms and the industry need to cultivate the behaviour they want to see in pension scheme members. Also, providing effective ‘engagement points’ will be important. Recent research found that many pension firms only engage with scheme members once a year, to send them their pension statements. But passivity is not an option.
Customers need firms to help them move from inertia to ‘invested’ and to remain there. They need to understand the stages they are at in the behavioural cycle. For instance, a customer may be overwhelmed by information – so in these circumstances, perhaps it would be useful to offer some free (or very low-cost) advice? Provided this was targeted and the firm understood the needs of the customer very clearly, this would be a effective way of engaging and the firm should clearly be able to demonstrate the added value they were offering. More could also be done to demonstrate the benefits of delayed gratification – gamification could be a good way of doing this.
Similarly, the question of ESG is an increasingly pressing one, particularly, according to several surveys, amongst young people. Ordinary investors are more keen than ever to see how their money is being invested. Demonstrating how the money is actually being used to support projects would be a powerful way to help people assign an emotion to a pension. This could also make campaigns more interesting and interactive as customers can see how they have a stake in the world around them through their pension funds.
Moreover, the truth is that one of the best ways of getting people to do something is by reminding them that their friends and those in their communities are all doing it. Mobilising the current trend for polarised politics and the passion that is inciting in certain groups could be a way of doing this. If it turns out that people are invested, via their pension funds, in a programme which boosts wellbeing in one particular area, this could be a real incentive for long-term saving. It would be akin to supporting a charity while saving adequately into a pension.
What about robo-advice? As the poster child for both technology in financial services and the ability to harness behavioural insights via algorithm, these have grown exponentially in the last few years. However, these still have as yet undetermined issues surrounding regulation and advice. The public is perhaps not quite ready to take their own finances entirely on their own shoulders.
So, while the technology is there to enable us to reach or goals, as an industry, we need to work with consumers to cultivate the right type of behaviour. If we can make customers feel emotionally invested in their pension, for as many reasons as possible, we’d be in a very good place.