16th November 2011
First saw the transition from the traditional basis for retirement income, the state pension supplemented mainly by occupational final-salary pensions, to a system based on defined contribution or personal pension saving. Now there is the introduction of auto-enrolment for workplace pensions, with companies legally obliged to start enrolling staff into workplace pension schemes from October next year.
However, there are reports of a possible delay to this reform.
David Prosser reports in The Independent: "The argument is that it is the wrong time to be asking employers, particularly small and medium enterprises, to take on the costs of auto-enrolment – both of administering the scheme and of contributing on behalf of staff."
So what, we ask, are some mindful methods to improve retirement prospects for pension savers without feeling overwhelmed by complex choices and reforms?
Mindful Money's resident psychologist Kim Stephenson and blogger says: "Nobody deals with paying the price now, for benefit later, particularly well. That's why there is an obesity epidemic as well as why people don't save for pension. If you have a choice; eat a carrot, go for a healthy jog for three miles, have a quick shower, pay for exam entry and for a pension then study for three hours, or, alternatively, sit on the sofa, eat chocolate, watch a movie, have more money to hire more movies and buy more chocolate – what do you do? That's why we've got people who are obese, under qualified, unhealthy and without pension."
Active vs. Passive decisions
Given that employees will be forced into retirement saving through auto-enrolment, this will work well considering basic psychology. Left to our own devices, we are likely to remain inactive.
Kim explains: "People are more likely to regret decisions they've made actively than ones they make by default. Deciding not to decide is still a decision, but most people don't treat it as one… It isn't logical, but that is the way the human mind works. We regret things less if we don't make an active decision."
Encorporating a workplace ISA into pension reforms would be another method of taking advantage of active vs. passive decisions.
Tom McPhail, head of pensions at Hargreaves Lansdown, says: "Auto -enrolment should incorporate a work place ISA into which an employee could have contributions paid. Employees should automatically get one of each account through auto-enrolment. The ISA should be linked to their pension with online access to both accounts and with the freedom to move money between the two accounts without having to sell investments and then repurchase them (what's called in-specie contributions)."
Keep things simple
Standard Life's Keep on Nudging report, prepared along with behavioural experts, found that people respond well to numbers when they are kept simple.
For example, telling young people that for every £100 a month they are saving from age 30 they will get £300 a month for the rest of their life after retiring at age 65 – therefore tripling their investment – went down well, as effectively they saw it as getting free money. Another statement that worked well was to tell them their money will be effectively doubled at retirement.
Knowing the pension saver
It is human to prefer limited choices, and pick the middle choice, according to the Standard Life report – and psychologists.
Kim, Mindful Money blogger, says: "If you give people more than three choices most people won't make a decision and if you give them three, most will pick the middle one. More information doesn't actually make for better decisions in most cases."
He adds: "Some commercial companies are good at using this sort of information, Governments are appalling at it. Finance companies still haven't worked out that "know the customer" depends on framing effects and the way you phrase the options can make people reverse their choices. So if you say – "this is 50% more likely to make you money" you'll get a different answer to a "risk questionnaire" than if you say "this is 50% more likely to lose you money"; logically they are the same but people don't operate on logic. A pension, with different funds, is like this, and so is an invite to join a fund or advertising material for a policy – the way it is phrased has a huge impact."
People welcome saving more – if suggested in the right way
Considering auto-enrolment, employees would be enrolled at a 4% contribution level, but one of Standard Life's ‘nudges' says that every time they receive a pay rise, their contribution level could increases in a gradual way. It added that this idea went down well, and behavioural psychologists said that it appealed to people as they would start to save a meaningful amount and therefore believe the pension to be worth staying in for longer.
But the reason people aren't saving enough isn't just about simple or complex
Kim Stephenson says: "Gordon Brown said it was because pensions are too complicated. That isn't the point, the point is that people find pensions boring. Children of six can use smart phones that are incredibly complex, but the children don't care – they are interested and they want to use the phone, so they do. Who in the
ir right mind, unless it is part of their job, wants to spend valuable living time studying all the arcane pension laws?"
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