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Using inertial and behavioural traits to boost pension contribution levels
Posted on 21-07-2009 | 0 comments
In my previous blog I highlighted the positive impact that increased pensions contributions combined with the right investment strategy can have on potential levels of retirement income.
Whilst this is clearly fine in theory, the pensions industry clearly faces a challenge in getting scheme members to sign up to this sort of contribution arrangement. In particular, recent market turmoil has resulted in increased skepticism regarding the relative benefits of long-term savings versus shorter-term ‘living’ expenditure.
However, there is evidence that inertia and other behavioral traits can be used to boost employee savings rates. For example Thaler and Benartzi (2004) propose the Save More Tomorrow (SMT) scheme as one potential solution to this issue.
In the initial SMT experiment, employees of one US company who had low savings rates were invited by a financial planner to raise their savings by up to 5% of their salary. 22% of the employees decided not to sign up to this immediate increase. These employees were then offered the SMT plan, where savings would go up 3% every time they received a pay rise. 78% of these employees accepted the SMT plan and their annual savings rose from 3.5% to 13.6% after four years. Interestingly, for those employees who opted for an immediate increase, the resulting average savings rate was only 8.8% of salary.
These findings suggest that people find future commitments easier to accept than current action, and are less resistant to forgoing future pay rises than seeing a reduction in take-home pay. As providers continue to evolve their corporate pensions propositions, building in this type of feature would support increased long-term savings levels whilst improving the chances that employees achieve meaningful salary replacement rates.
Do as I Say - How do we confirm that business decisions are being made in line with ERM vision?
Posted on 01-07-2009 | 0 comments
This relates closely to some of the discussion below around senior management’s understanding of models. For ERM to be useful, senior management needs to fully buy into the ERM vision, and what it means for their business models. If it identifies economically non-viable business policies, senior management needs to be willing to listen and learn from those insights. In the global insurance sector, this is happening, but it takes time, and some firms will embrace this more quickly and fully than others.
This can be a challenging process – it is not an easy message for ERM to take to the Board when ERM believe that the firm’s most successful product is loss-making, or that the firm is inadequately capitalized. These implementation challenges quickly move from intellectual and technological to cultural and political.
Fundamentally, for business decisions to be fully aligned with ERM, there needs to be a completely holistic and consistent approach to assessing market-related risks and costs in all product lines and in all forms of market risk. Management compensation and structure then needs to be aligned to these metrics as well as defining what exposures MUST be escalated to the boardroom table.