Using inertial and behavioural traits to boost pension contribution levels
Posted on 21-07-2009 by Philip Mowbray | 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.
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