Sly and Retiring: Fraudsters, Pension Lump Sums and Behavioural Science

Published: February 11, 2015

“Lessons learned overseas and new thinking from behavioural science could help with both the accumulation and decumulation phases of retirement”

Despite laudable attempts to steer discussion towards the long-term, Reform’s pension debate this week inevitably veered back towards the likely impact of pensions freedoms less than two months away. From fraudsters preying on unsuspecting pensioners, through to mass confusion over taxation rates and products, you could be forgiven for thinking that people are taking a gloomy view of the changes.

Far from it. From consumer and charity representatives, through to providers and policymakers, there was consensus that the changes are, in the main, a good thing. People should be treated as grown-ups and given the freedom and choice to do what they want with their money.

As Lord Hutton warned, however, we must not lose sight of the overall policy goal – namely ensuring that people save enough to secure an adequate stream of income in retirement. Likewise the state, industry and civil society should provide help, advice and guidance to help people achieve their goals.

As a number of speakers mentioned, lessons learned overseas and new thinking from behavioural science could help with both the accumulation and decumulation phases of retirement. For example:

Make greater use of technology to provide timely and compelling feedback about savings and investment performance. The use of apps in Australia has helped to dramatically increase the percentage of people who can accurately predict the current size of their pension pot and increased engagement with pensions in general. Add in another of Lord Hutton’s suggestions – namely that people should be told the likely income that they will receive in retirement, rather than their fund size – and there may be an opportunity to engage people more effectively.

Consider wider use of the default in both the accumulation and decumulation phases. Given that current contribution levels in auto-enrolment are likely to be insufficient, introduce a gradual escalation of contributions, echoing the work that has been done in the US with the Save More Tomorrow programme. Similarly, consider introducing some form of longevity insurance default in the decumulation phase – even if it is for just a small percentage of the overall pot – to help prevent people from running out of money. As research shows time after time, most people don’t want to take big risks with their money and want at least some level of guaranteed income in retirement.

Which leads on neatly to the third suggestion. Despite people’s desire for a guaranteed income, the word annuity is regarded as toxic. Many of the new products that will soon be introduced will do doubt have names that either hold negative associations or mean nothing to people outside the industry. Instead, encourage value-focused thinking to help people to identify what their real goals and objectives are in older age. And reframe the discussion so that it uses ‘product’ terms and an approach that people understand. As one speaker commented, ‘salary replacement’ may be a better way to describe different forms of retirement income.

The expected and actual short-term impact of impending pensions freedoms will no doubt dominate money sections for many months to come. But, as the Reform event made clear, we shouldn’t lose sight of the longer-term policy goal and the opportunity to apply thinking from overseas and academia.

Simon Maule

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