What savers want and what this means for CDC
Paul Cox
NEST
University of Birmingham
21 January 2015
© NEST Corporation 2013
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1
Introduction
• If sharing risk is able to smooth some high and lows in investment volatility, an
important question is do consumers value this?
• Aim is to playback results from consumer research studies that speak to consumer
demand for lower investment volatility.
• Aim is also to suggest where CDC might focus.
• No separation of research into the building-up of retirement savings and drawing a
retirement income from these savings.
© NEST Corporation 2013
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What people say they want
Just Retirement (2014)
Opinion Leader(2010) – mid career
3 in 4 generally unwilling
to take risk
1 in 3 unwilling to take risk
1 in 4 willing to take
some risk
1 in 2 willing to take
some risk
Ignition House (2014)
© NEST Corporation 2013
Opinion Leader(2010) – nearer retirement
2 in 3 unwilling to take risk
1 in 2 unwilling to take risk
1 in 3 willing to take a
small risk
1 in 3 willing to take
some risk
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What people mean they want
What research participants often mean when they say they are willing to take
some risk
Articulation to consumer
Interpretation by consumer
High chance of a loss
with greatest chance of
biggest gain
Some chance of loss
with some chance of
modest gain
Low chance of loss with
low chance of small gain
Source: PADA Attitudes to loss
© NEST Corporation 2013
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High chance of a loss with
greatest chance of biggest gain
same
Lowish chance of loss with
some chance of modest gain
different
Low chance of loss with low
chance of small gain
same
What people actually did
Behaviour during the 2008 financial crisis
Just under 1 in 2 individuals contributing to DC schemes
took some form of action, of which ……
1 in 4 switched funds
1 in 7 stopped all pension contributions
…and 1 in 12 decreased contributions
Source: NEST and Pension DCisions
© NEST Corporation 2013
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What most people appear to want
Overall, research participants are telling us about a preference for capital protected
investments, but also that they’ve little understanding of what this type of investment
strategy is, other than cash.
Capital
protected
investment
Where very risk averse, the main reasons respondents give for this are
Do not
want to live
with the
worry
29%
Returns not
deemed
worth the
risk
29%
Prefer high
interest
savings
14%
Source: Just Retirement
© NEST Corporation 2013
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Do not trust
providers with
my money
14%
Relative importance of capital protection
What features are most desirable in a DC retirement product?
Rank of most valued (1) to least valued (4)
Pension fund type
Nominal
Typical Balanced guarantee
DC
DC
(CPPI)
Cash
Ordering based only on how good the £ outcome could be –
illustrated as a probability
4
3
2
1
Ordering based on how good the £ outcome could be, how
good the protection is, and how low is the cost – as star ratings
2
3
1
4
Ordering based on how good the £ outcome could be, how
good the protection is, and how low is the cost - as a probability
4
1
3
2
(row 1) Instinct - 40% of respondents favoured the product with the lowest risk attached.
(row 2) Trade off – 1st a desire to protect money, 2nd to achieve a good outcome.
(row 3) after more time & information – Balanced DC not significantly better than cash.
© NEST Corporation 2013
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Source: NEST
Summary
•
Research has highlighted a behavioural risk that scheme members may behave in a way
contrary to what would be considered their best interest.
•
We’ve also identified a real risk that investment volatility and loss can disrupt inertia.
•
Research has focused more on effect directions than on effect sizes.
•
Research has focused more on attitudes and emotions than on behaviour.
•
Risk links to lack of control, and not feeling in control influences the perception of situation.
When there’s a lack of control people tend to interpret uncertainty associated with the
situation negatively. Some people catastrophise investment uncertainty.
•
Limbic system of our brain governs emotions and behaviour – it doesn’t rationalise risk.
•
Neocortex is the newer part of our brain that serves higher mental functions but a significant
amount of explanation is required to get the concept of risk into it.
•
The level of explanation required is not readily scaleable.
•
Innovations in product design could aim for better balance between risk, certainty, & return.
© NEST Corporation 2013
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CDC
• It’s not all or not at all - can embrace some assets, some age groups, some time
periods, with clearly identifiable goals and types of risks to share.
• Helpful if it can raise level of certainty - Research participants value certainty at
levels < 100%. Seems that < 100% can help with the ‘more or less what will I get’
question. Future research could focus on what’s the best level.
• We’ve examples of shared risks in accumulation and decumulation, but helpful
would be more concrete examples to illustrate where, when and how within the
UK environment – without that there’s little comparative appraisal for trustees.
•
Example: sharing some of the risk of the cyclical sector
© NEST Corporation 2013
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Sharing some of the risk of the cyclical sector
11%
Non-cyclical
sector
volatility 9%
15.9%
7%
9.1%
Extra volatility of cyclical
sector
non-cyclical sector volatility
extra volatility of the cyclical sector
Jul 89 to Jun 92
Jul 92 to Jun 95
Jul 95 to Jun 98
Jul 98 to Jun 01
Jul 01 to Jun 04
Jul 04 to Jun 07
Jul 07 to Jun 10
Jul 10 to Jun 13
Jul 13 to Dec 14
Jul 89 to Dec 14
9.4%
11.2% 5%
12.5%
3%
6.6%
16.6%
11.2% 1%
8.5%
11.9% -1%
0%
© NEST Corporation 2013
10%
20%
30%
10
Cyclical sector volatility minus non-cyclical sector volatility: 3
Extra cyclical
year rolling
sector
Cyclical
sector
volatility
17.5%
9.6%
11.3%
19.2%
18.3%
10.0%
25.8%
17.6%
10.6%
16.6%
volatility
1.7%
0.6%
1.9%
8.0%
5.8%
3.3%
9.2%
6.4%
2.0%
4.7%
Jan-92
Dec-92
Nov-93
Oct-94
Sep-95
Aug-96
Jul-97
Jun-98
May-99
Apr-00
Mar-01
Feb-02
Jan-03
Dec-03
Nov-04
Oct-05
Sep-06
Aug-07
Jul-08
Jun-09
May-10
Apr-11
Mar-12
Feb-13
Jan-14
Extra volatility of the cyclical sector