How can we incentivise pension saving? A behavioural perspective

1. Background
2. Research question and aims
3. Methods
4. Findings
5. Recommendations
6. Points to consider

Background

Traditional economic theories of savings assume that people make rational decisions about when and how much to save; behavioural theory suggests that people are subject to unconscious habits and biases that influence their behaviour and that this is part of the reason that so many people fail to make adequate provision for their retirement. Hence, the use of behavioural ‘nudges’ to incentivise people to save is growing. This paper discusses such behavioural approaches to encouraging people to save for retirement.

Research question and aims

The paper aims to explore the issue of incentivising retirement savings, from a behavioural perspective, to understand to what extent behavioural-based interventions have succeeded, and to look at the interplay between behavioural and traditional economic approaches. In particular the author examines the impact of automatic enrollment into a pension, looks at other ways of changing the ‘choice architecture’ for people not affected by automatic enrollment, and explores the effect of simplifying pension choices to take advantage of people’s reliance on rules of thumb to make decisions.

Methods

Whilst no details are given on how sources were chosen or excluded, this paper draws more than 40 separate sources, primarily academic or government publications, and primarily from the UK and the US.

Findings

The paper finds that:

• Incentives to save are needed, particularly in the light of an ageing population that has under-saved
• Behavioural approaches to encouraging saving for retirement have become more common due to dissatisfaction with traditional interventions, the growing use of behavioural approaches more generally, and the urgency of the issue.
• Whilst there are some behavioural-based approaches that seem to have an impact, they are most likely to be successful when combined with traditional approaches.

Recommendations

The author recommends that 'integrating behavioural and traditional economic measures is probably the best way forward and these in turn, should sit alongside other measures, such as regulation in the range of policies at one’s disposal' and also that further analysis is required 'to integrate systematically and consistently behavioural and economic factors into analytical frameworks in order to judge the effectiveness and impact of incentives policies' (Hardcastle, 2012).

Points to consider

• Relevance: The paper highlights the urgency of the issue due to widespread under-saving amongst an ageing population.
• Generalisability/transferability: Whilst many of the papers used as evidence were written in other countries, particularly the US, the behavioural effects discussed have been widely reported in many contexts.
• Methodological strengths or limitations: The methodology of the review is not discussed. The author is a Senior Research Officer in the Department for Work and Pensions (DWP) working on private pensions research and uses more than 40 separate sources to make his case; this suggests the review is thorough and credible.

Full report

How can we incentivise pension saving? - full report