We are living through the UK’s most ambitious behavioural economics initiative. Since 2012 every employer is on the road to automatically enrolling almost all employees into a pension scheme, and paying a pension contribution for them.
There is no doubting the success of automatic enrolment. The Pensions Regulator say more than seven million workers have now been signed up for a workplace pension. Even then, we are still, to some degree, at the start of this journey.
The very smallest employers have yet to enrol; pension contributions are still to be ramped up to a total 8% (and arguably should go higher); and something needs to be done to encourage the self-employed to save.
But because of auto-enrolment’s effectiveness we can expect to see more such initiatives to help us achieve better outcomes from long-term saving.
The Pensions Policy Institute (PPI) recently took a deeper look at the role of various behavioural techniques – such as compulsion, defaults, consumer protection, behavioural interventions and freedoms. This is what they found:
- Timing matters – behavioural interventions are most effective when it’s a ‘teachable moment’. This varies for different people but is usually a key transition – for example moving house, getting a job, or starting a family
- They should take personal circumstances into account – things like prior levels of knowledge and understanding, personal circumstances, cultural attitudes, income levels, gender, and age
- Personalised interventions are most effective – those where people feel their own needs, circumstances and goals are addressed. And this is done best through some human interaction, such as face-to-face or telephone
- Younger people like digital methods for advice, information and guidance
- Older adults (over 75) generally have lower financial capability and commonly are less likely to use digital methods
- Letters, posters and advertising raise awareness but are less effective than interactive personalised interventions
- Media campaigns (TV and social media) are successful and can motivate people to take action but, without sufficient financial capability, not necessarily to make the optimal decision
- For the non-engaged defaults or compulsion may be best rather than defer action until they achieve a higher level of financial capability to make a decision. This is the policy approach the UK government has taken for pension saving
Some of these observations sound obvious. But the obvious is often overlooked, and they are all relevant as behavioural techniques play a more central role in getting people to save more. They are also useful for all of us when considering how to communicate with clients to get across a point or to encourage certain behaviours.
The report clearly shows the best intervention to encourage most people to act is probably face-to-face and directly relating to someone’s personal experiences. Compulsion and defaults can be effective, but the circumstances we can use these policy levers are probably more limited.
And that brings us back to the age-old question of how we can offer face-to-face advice or guidance to everyone. I strongly believe we should be shouting about the benefits of personalised regulated advice from the rooftops, and encouraging all who can to access this. But many won’t be able to. And for them guidance and interventions have a role to play.
Automatic enrolment is one social financial experiment. And there will, no doubt, be others for pension savings. The trick is going to be using the right policy lever at the right time for the right people.