Could behavioural science help people put more money into their pensions?

How much do you pay into your pension pot every month? How do you know it’s the right amount?

While thanks to auto-enrolment most employees in the UK now save regularly into a pension, many aren’t actually saving enough. The Institute for Fiscal Studies (IFS) estimates that about 4 in 10 current employees will not have an adequate retirement income. 

This is partly because most people stick to the default contribution rate that their employer sets, which is often not higher than the 8% legal minimum, instead of the 12 – 15% that many calculations suggest is needed to achieve an adequate income in retirement.¹

There is of course the reality that many people don’t have the resources to increase their contributions right now. But for others, this is not true: they do have money left over at the end of the month and, for them, the outsized impact higher pension savings will have in later life makes the relatively smaller amount of money foregone now seem worth it.

The pension lesson from the past

People not taking simple steps today to guarantee a better financial life tomorrow? Sounds like a problem we’ve seen before.

Before 2012, there were real fears for a future financial timebomb – not enough people were saving into workplace pensions, creating huge risks for them and wider society as defined benefits pensions became less and less common. The solution? Behavioural science’s favourite piece of policy design: auto-enrolment into workplace pensions.

Automatically enrolling people into their workplace pension, rather than nudging them through communication to make an active choice, led to a 60% increase in UK employees saving for retirement between 2012 and 2021. All it took was a switch of the default from opt-in – having to complete a form to sign up to a workplace pension – to opt-out – not having to do anything to sign up.

Defaults and human behaviour

Today’s debate follows the same pattern: given how important it is to save for retirement, why are those who could not increasing their contributions? 

And just like in 2012, the reason is the same: defaults have a disproportionate impact on human behaviour. There are several potential explanations for this, apart from the default just being the ‘easy’ choice. Most importantly in the context of a highly complex decision (and pension savings fall into this category) it could be that the default is perceived as the option recommended by ‘experts’.

So what can we do?

There seem to be two options: (1) changing the default; (2) helping people to take action themselves. The past experience has led to the argument for increasing the legal minimum contribution rate so that the median earner can expect an adequate income in retirement. It seems likely that the UK will move in this direction as an outcome of part two of the (currently postponed) Pension Review. 

But this new default for all will only be ‘right’ for a  – quite hypothetical – median earner with the – equally hypothetical – average life. People on lower incomes might end up saving too much, at the expense of their financial wellbeing today and people on higher incomes could be under-saving even with increased defaults.

So while an increase in the overall default is likely to lead to higher pension savings, it can only be part of the solution. We believe that there are two more options: targeted defaults and harnessing behavioural science to help people make a choice.

Harness data to target defaults 

The simplest version of this would set the default lower for below-median earners, addressing the concern of over-saving. But by harnessing data held by pension providers, employers and government, it would be feasible to factor in not just income, but potentially also other factors that will influence how much someone will need in later life, such as whether the individual owns property, where they live and whether they are in a relationship (although all these can of course change over time). 

Help people to take action

But there will always be individual circumstances that cannot be picked up in data held by the employer or pension fund. So we will need to help people make a choice. We know this is not an easy task, given how low engagement with workplace pensions is. But we believe that more can be done, and the evidence we have from the behavioural science literature gives an idea of what might work:

• Engage employees at timely moments: When we change employers, many of us receive little more than some information on our workplace pension with our contract and a welcome letter from the new pension provider. After that, the engagement is often zero. But we know that people are more likely to change their behaviour at important milestones in their lives. Starting a new job, getting a promotion, or returning to work after parental leave – all events that are captured in administrative data – are opportune moments for employers or pension providers to encourage individuals to consider their pension contributions. 

• Provide rules of thumb and targeted support: There are rules of thumb on how much people might want to contribute – but they usually come with the disclaimer that it depends on individual circumstances and the ‘lifestyle’ envisaged in retirement. Many of us find it hard to picture what life might look like next year, let alone several decades from now. The FCA’s proposal for targeted support – guidance for what ‘people like them’ might do in a given situation – provides an opportunity to help people save more. The objective here is not to ‘nudge’ people into a specific direction, but to ‘boost’ their ability to make an informed decision and to choose their own heuristics.

• Help people overcome their own biases: One of the reasons we don’t put more money into our pension is that we are present biased: we are reluctant to give up money today, even if that means that we will have more tomorrow. The Save More Tomorrow campaign in the US allowed pension savers to commit their future selves to making higher contributions, with pay increases triggering higher contribution rates. Similar approaches could allow UK employees save more without having to accept cuts to what they have available today. 

• Make it easy to make informed decisions: The proposed pension dashboards, which will allow pension savers to see all their pensions in one place, provide a huge opportunity to make it easier for those who want to take proactive decisions – from adjusting their pension contributions to transferring and consolidating their pots – to do so. It won’t be a magic wand for getting the majority of pension savers ‘engaged’, but by presenting information in a meaningful and standardised way it can again ‘boost’ informed decision making. Timely prompts and targeted support can be incorporated in the dashboards. 

None of the solutions above will be a silver bullet on its own – they will need to be combined to lead to meaningful results. What we need 13 years after the introduction of auto-enrolment is a pension system that fully harnesses the power of behavioural science: increase default enrolment rates, but don’t assume that a one-size-fits-all will work. Government, employers, and pension providers should do more to harness the data they hold to both tailor defaults and to support people to take action. 

If you would like to discuss these ideas further, please reach out to [email protected].

¹There is a separate, very lively debate around what ‘adequacy’ means – for the purpose of this blog post we will take this as given. Also because we, as behavioural scientists, see our job in helping people reach good outcomes, rather than defining what these good outcomes are.