Without being melodramatic, we owe it to our children and grandchildren to persuade all working people to save for a private pension. Future generations should not be faced with paying spiraling taxes to meet the cost of state benefits for previous generations who refused to save.
Whilst medical science has greatly improved longevity, the flip-side means the average state pension will be paid for 20 years, or more, as mortality continues to improve.
In 2006, the Department for Work and Pensions commissioned research to get consumer views on its proposals for personal accounts. Eighty-four percent of respondents stated they welcomed the introduction of personal accounts in 2012. However, only 23% ‘felt they knew enough about pensions to decide, with confidence, about how to save for retirement’.
Raising financial awareness has registered with both the government and the pensions industry. Financial education will begin in schools and pension providers are developing tools to better explain the issues in taking financial decisions.
AXA has worked with Professor Benartzi, of UCLA in the United States to research financial behaviour.
Benartzi has considerable experience in this field, including behaviour when faced with the opportunity to join a company pension scheme. Reasons for not joining are typically:
• Inertia, people recognise they should save, but never get around to joining.
• A preference for immediate gratification, spending their money on a holiday, car, or social event.
• An aversion to the risk of making a loss, a worry of getting back less than the amount saved.
Logically, gaining knowledge of the issues should allay these concerns. Research studies have considered the important question of whether education is effective in changing behaviour. The conclusions are that whilst education may change employee intentions, it has a minimal affect on changing actions.
The key is to engage employees to take an interest in saving for a pension. Technology now enables us to offer highly effective and personalised information to explain the benefits and advantages of joining a pension scheme.
Research suggests positive images can change financial behaviour. Often pictures are far more powerful and persuasive than words. The use of vivid pictures and appropriate statements may convince an individual that the benefits of having a private pension at retirement clearly outweigh the immediate financial ‘pain’ of less take-home pay.
The aim is to get the individual to closely identify with the information received. Computer technology enables us to use client payroll data, and segment employees into groups using variables like age, sex and income. Applying the characteristics of each segment we can produce personalised information leaflets and illustrations using ‘just in time’ printing techniques. Evidence suggests employees are more likely to engage where the formation suggests the scheme is right for them.
The pensions industry must work smarter to engage those not saving and bespoke communications can help break down the barriers.