After the nudge
A pressing engagement
with pensions
Contents
04 Foreword
05 Introduction
06 Are we engaging?
08 Nudging towards engagement
10 Active decision-making
14 Positive engagement
17 Shaping positive outcomes
18 Time to engage
2
After the nudge: A pressing engagement with pensions
Time to engage
We are at a pivotal moment.
Through automatic enrolment
many people are starting to
save for the first time.
We have an opportunity to ensure they engage with a
savings strategy earlier in their lives than ever before
and make saving for the future a social norm.
Automatic enrolment needs to be looked upon as just
the start of this journey and not the destination.
After the nudge: A pressing engagement with pensions
3
Foreword
The past few years have been very eventful for
everyone in the pensions industry.
We’re at a pivotal moment for pensions.
So much has changed in the past couple of
years alone, and there’s still more to come.
The Retail Distribution Review has brought
greater transparency, and automatic
enrolment has meant that many people are
making pension contributions for the first
time. At the same time, the 2014 Budget
changes are giving people much more choice
over the way they use their pension savings.
According to the latest figures from the
Pensions Regulator, around 5 million people
have been automatically enrolled into a
workplace pension1, and that number is
growing steadily. But that doesn’t mean that
the challenge of providing for a long-living
retired population has been solved.
The Chartered Insurance Institute estimates
that the UK is £9 trillion short of what would
be deemed a “comfortable retirement” for
most people2. That large shortfall needs to
be considered alongside the fact that people
are living longer than past generations: the
proportion aged 65 and over is expected to
increase by one third over the next 20 years3.
From our own research4, we know that
people want to take responsibility for their
pensions, but many have never had to make
complex decisions of this kind before. They
will need help and support as the risks of
making the wrong decisions are significant.
For example, they may not be able to afford to
retire before their health fails, or they might
run out of money in retirement.
Barry O’Dwyer
The research also suggests that people may
not be happy to rely solely on government
agencies to give them the right guidance;
they may expect their employers to help.
Managing Director,
Corporate,
Retail & Wholesale,
Standard Life
Which means that even with all the radical
change we have seen, there is a still a
revolution needed in the attitudes and
behaviour of individuals. We need to show
people that their pensions are relevant,
practical ways to save, rather than something
that just happens automatically with their
wages or salaries.
We need to make pensions part of people’s
lives, not just their futures.
Still, the good news is that pensions are now
firmly on the agenda for millions of people
who may never have thought about them
before. The next big challenge is to turn
that awareness into positive action and get
them saving, not just because of automatic
enrolment, but because they are properly
engaged with planning for a long and
active retirement.
1
Declaration of compliance report, The Pensions Regulator, August 2014 http://www.thepensionsregulator.gov.uk/docs/automatic-enrolmentmonthly-registration-report.pdf
2
http://www.cii.co.uk/about/news-and-insight/articles/charteredinsurance-institute-report-puts-uk-retirement-savings-deficit-at-%C2%A39-trillion/3162
3
Later Life in the United Kingdom, Age UK, August 2014
4
‘Retirement: it’s not what it used to be: how the changes to pension rules affect your people and your organisation’ – research from Standard Life, August 2014
4
After the nudge: A pressing engagement with pensions
Introduction
It’s widely recognised that the UK population are
under saving for their retirement. A lack of adequate
individual savings combined with the challenges of an
ageing population is putting millions of people at risk
of a significantly reduced standard of living in later life.
The Department for Work & Pensions (DWP)
estimates that just over 13 million people
are not saving enough to maintain their
lifestyle once they retire, entering a possible
‘pensioner poverty’.
During research we conducted and
summarised in our report ‘Keep On Nudging’,
we found that the barrier to saving for the
future is not simply affordability, but often
inclination and perception.
When we think about the savings gap and
the steps needed to encourage greater,
longer-term savings, we tend to equate
such a big problem with a big solution.
That often means an expensive solution,
such as changes in legislation, IT systems
or sales channels.
The purpose of this paper is to consider how
we can build on automatic enrolment to help
address the savings shortfall by considering
the way that, as an industry, we communicate
the need to save. We will examine how we can
engage with people, shift perceptions and
change behaviour by encouraging them to
save more for retirement.
However, while there are already many big
changes underway, a greater understanding
of the wider behavioural and psychological
issues surrounding people’s attitude towards
money and their old age is crucial.
Barrier to saving
is not simply
affordability
After the nudge: A pressing engagement with pensions
5
Are we engaging?
Automatic enrolment is a great start, but to ensure its
success we need to get people actively engaged
in saving.
The rationale behind automatic
enrolment is that by changing the
process by which people make
choices about starting to save, more
people can be encouraged to save.
So rather than having to choose to
start saving into a pension, people
will have to choose not to save.
This change certainly seems to be making a
difference to the numbers of people saving –
with the latest figures showing less than 1 in
10 people choosing to opt out of the pension.
In many ways, saving into a pension is fast
becoming a social norm. But if the prevailing
social norm is to simply have a pension,
regardless of the level of contributions or the
pension’s end-value, reliance on inertia has
its risks later – once enrolled, people may
never make active decisions about
their pension.
While changes in legislation could play a role
in getting people to save more, the frequency
and nature of the way we communicate
with people will become increasingly
important if we are to create a more robust
savings culture, one where taking personal
responsibility for long-term savings becomes
the norm. This failure to engage people in the
need for long-term savings will undermine the
impact of automatic enrolment.
When looking at the success of other automatic
enrolment schemes outside of the UK, the
DWP found that evidence suggests automatic
enrolment on its own may not be enough to
increase aggregate saving. Research carried
out in the US found the ‘active decisions’
approach increases participation and savings
rates relative to an automatic enrolment
approach that relies on inertia.
Move to active
engagement
6
After the nudge: A pressing engagement with pensions
In other words, we cannot be
satisfied with the aim of making
it a social norm to have a pension.
On its own that will not be
enough. Instead we need to make
engagement with, and control of,
your financial future the new
social norm.
Michelle Cracknell
Chief Executive,
The Pensions Advisory Service Ltd
Post the Budget announcement about pension freedoms, we’ve
seen an increase in the volume of calls to our helpline and the content
of the calls suggest a more positive attitude towards pensions.
The focus of the calls have been how to access the pension fund but it
could be a catalyst toward people being more willing to save for their
retirement. As to that, more work needs to be done to help people save
more. For many people, the barrier to saving is not affordability but
lack of knowledge or confidence in know how and where to save.
It appears to us that while there are
undoubtedly benefits to accrue from
automatic enrolment, we also need to address
a fundamental issue – most people are not
sufficiently engaged by the messages that
“I have been receiving a small employment pension since 2004. I contacted them
have been used in the past to encourage
about cashing in (as per the Budget March 2014) as a small pension pot and
them to save.
receiving a lump sum. They have told me I cannot do this as I am already receiving
The big question for the whole
pensions industry is how to make
sure people become engaged in
saving for the future.
this pension. I have checked on-line and they say I can, I know the whole amount
will be taxed but my provider says it is not possible. I have a friend who is in
exactly the same position as me but with a different pension provider and they
have already sent her a form so that she can claim a lump sum if she wishes.
Can you help me with this?”
Caller to The Pensions Advisory Service helpline
Many of the calls to our helpline illustrate that people are confused
by the rules and the language that is used. The evidence is that,
despite the industry’s best efforts to help people by providing them
with plenty of information, this may have the opposite effect of
overwhelming people.
“Given the changes on 6 April 2015 and the fantastic timing of my 55th birthday,
am I able to take 25% of my personal stakeholder pension out tax free and leave
the other 75% in the pension plan (as I don’t want to be pushed into a higher tax
bracket by taking the whole lot out) and feel the 25% would be better invested in
property than the pension plan? The wording I have read and the information in
the financial press is a bit confusing and you presumably know all the small print!”
Caller to The Pensions Advisory Service helpline
The barriers that are stopping people saving for
retirement are not insurmountable. But there is still
work that we as an industry can do to engage with
people. We need to help them become more confident
about dealing with their pensions, and make it easy for
them to start saving.
After the nudge: A pressing engagement with pensions
7
Nudging towards
engagement
By creating compelling communications we can make
it easier for people to see why saving for the future is
an important part of their life.
For people affected by automatic enrolment, a lack of engagement in savings could mean a lack
of income in retirement.
To ensure the success of automatic enrolment, it is vital that we look at how it can be used as
the first step in a strategy of engagement that lasts for the rest of an employee’s working life.
We carried out research into the area of automatic enrolment to explore the ways in which we
could encourage its success. We published our findings in a report called ‘Keep on Nudging’ and
what we discovered was that the way in which information was presented was vitally important.
Be positive
People responded best of all to messages
that were positive and beneficial and it
is important to highlight the benefits of
saving in ways that are easy to grasp, so
using simple pounds and pence rather than
complex equations and percentages.
If people are to be encouraged to prioritise
long-term saving then it is key that the
benefits are explained in straightforward
language so they can clearly see the upside.
The strongest call to action we found in this
research was to show people clearly what
they can expect tomorrow by trading off some
of their spending today.
Messages such as “the Government
contributes 20p to your pension
for every pound you put in” – were
very effective in engaging people.
8
After the nudge: A pressing engagement with pensions
The reality of the savings gap
makes it tempting to paint a
gloomy picture, but we now know
that people engage more quickly
and completely with more positive
and succinct messaging.
“I have an annuity and
wondered if you could
tell me if the new
regulations allow me
to do anything with
it, I have tried asking
the annuity provider
but I got a lot of waffle
in reply that sounded
vaguely negative”
Caller to The Pensions
Advisory Service helpline
Keep it simple
In the same vein we found that where there
is little awareness of tax relief for pensions,
messages such as “the Government
contributes 20p to your pension for every
pound you put in” was very effective in
engaging people.
Again, this research revealed that a barrier we
have to overcome with our communications
was not just affordability, but the fact that
saving was not a priority – in fact we found
that close to 70% of people in our survey
thought they would not find it difficult to save
an additional £50 per month and they could
easily come up with a list of luxuries they
could do without such as wine, taxis, fashion
and nights out. There was widespread selfawareness that they were making a “naughty
choice” by spending rather than saving.
“I am currently working
16 hours but don’t
pay into a pension as
my employer doesn’t
have any payment
arrangements. I was
wondering about a
private pension. Can you
possibly provide any
information?”
Caller to The Pensions
Advisory Service helpline
Mind your language
Age matters
Retirement vehicles are, by nature, complex.
This has traditionally led to long-winded
explanations of features and technical
terminology that is alien to most people.
Age 30 appears to be a pivotal
moment when it comes to
long-term financial planning.
During the course of this research we found
that terminology is very important.
There was a perception that pensioners
“spend all day gardening”, but most people
have more exciting dreams in mind for their
later years. So, by using terms like “pension”
we are reinforcing stereotypes and inertia
and so failing to engage with people.
In our research this was seen as a milestone
leading to a more serious attitude to financial
planning. In the focus groups we ran for
this research, we saw that the under-30s
believed they had all the time in the world
to think about their future, but many in their
mid-30s felt they had already missed the
boat and it was too late to start saving in
a meaningful way.
“Retirement income” or “a wage after work”
are terms we are exploring more to bring
closer engagement as well as using images
of people as they are today (younger and at
work) if we do talk about “pensions”. It’s
no doubt this is a tricky area, as we have
many years of using entrenched terminology,
but the evidence is clear that the way the
industry has communicated in the past has
not been as effective as we all need it to be
in the future.
We didn’t find that attitudes to savings varied
greatly between age groups but we did see
evidence that turning 30 presents a great
opportunity to find a receptive audience for
communications around financial planning.
“What is really confusing
is that the pension
annuity comes with
a ‘without overlap’
stipulation and we
have no idea what this
actually means”
Caller to The Pensions
Advisory Service helpline
By applying these findings to the way we
communicate the benefits of continuing to
save, we can start to make a positive shift in
the outcomes people can expect when they
come to take their retirement savings.
Clear and
well-presented
communication
of information is
vitally important
“I am confused about
how I get my company
pension. According to
[my advisers] who
hold the records, my
retirement age was 60.
So I thought I would
just get my pension of
however much they said
forwarded to me from
last October. Now they
are asking if I would like
an annuity?”
Caller to The Pensions
Advisory Service helpline
After the nudge: A pressing engagement with pensions
9
Active decision-making
People do not always make choices in a rational and
calculated way. In fact, most human decision-making
uses thought processes that are intuitive and automatic
rather than deliberate and controlled.
From April 2015 people in the
UK will have new freedom and
choice over how they take their
retirement income.
This means that they will soon be faced with
a number of decisions to make about how
and when they use their retirement savings.
Therefore an engagement strategy designed
to nudge people towards saving enough
for retirement must also look at how to
encourage active decision-making along
the way.
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After the nudge: A pressing engagement with pensions
Behavioural economics is a field of research
that looks at social, cognitive and emotional
factors that affect the way people make
financial decisions. This is an area we have
explored in detail over the past few years and
we have commissioned a number of research
programmes to gain a better understanding
of the entire range of factors that are at play
when people are making decisions about
their financial future.
Human tendencies and preferences that
could influence decisions in long-term
savings include:
Inertia:
A preference not to act or make a decision – also reflected in a preference for
the status quo and an aversion to planning.
Loss aversion:
People strongly prefer avoiding losses to acquiring gains.
A preference for immediate rewards:
People behave differently when confronted with a choice between an immediate
and future reward than when deciding between two rewards in the future.
Paralysis of choice:
Decisions may not be made because there is too much choice available.
A tendency to overestimate the probability of good events:
Winning in price draws and underestimate the probability of bad events
(poor health).
Social comparison, norming and herding:
People compare themselves to others and are sensitive to social norms and to
crowd behaviour.
A susceptibility to framing:
How information is presented influences how people respond to it.
On top of these human tendencies that influence decisions there
are other factors that impact particularly on financial services.
After the nudge: A pressing engagement with pensions
11
Why are there more behavioural
challenges in financial services?
For a number of reasons, consumer choice in
financial products and services is particularly
prone to errors:
¬¬ Many financial products are inherently
complex for most people. Financial
products are abstract and intangible.
They often have many features and
complex charging structures. Faced with
complexity, consumers tend to either
bury their head in the sand and put off a
decision, or simplify decisions in ways that
lead to errors.
¬¬ Many products involve trade-offs between
the present and the future. Often people
make decisions against their long-term
interests, e.g. spending money today
that would be better invested for future
lifestyle benefits.
¬¬ Decisions may require assessing risk and
uncertainty. People are prone to making
systematic errors in decisions involving
uncertainty. So they often misjudge
probabilities, on the upside or downside
depending on their personality or state of
mind at the time, and make poor insurance
or investment decisions.
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After the nudge: A pressing engagement with pensions
¬¬ Decisions are often emotional. Stress,
anxiety, fear of losses and regret, rather
than the costs and benefits of the choices,
can drive decisions.
¬¬ Some products permit little learning
from past mistakes. Unlike most
purchase cycles, some financial decisions,
such as choosing a retirement plan, are
made infrequently. There is therefore little
opportunity to learn from past purchase
decisions, and consequences are revealed
only after a long delay.
And, as if all those issues were not
challenging enough, it appears there is
another hurdle we must overcome when
communicating the need to save for
the future.
“Apologies in advance
if this is a stupid
question – I have
never fully understood
pensions! However,
I have had a couple
of Personal Pensions
running for some years –
am I right that combining
the calculated income
from State Pension, work
pension and personal
pensions will tell me
how much my pension
will be?”
Caller to The Pensions
Advisory Service helpline
The future self
“When you make a decision
now about yourself in the future,
that distant self almost feels like
a stranger.”
So says Hal Hershfield of New York
University’s Stern School of Business5.
In fact, the research undertaken in 2011 by
Hershfield and his team showed that when
we think about ourselves in the future we
actually use the same part of our brain that
we use when we think about a stranger.
To people estranged from their future selves,
saving is like a choice between spending
money today or saving it and giving it to a
stranger years from now.
If we could envisage ourselves in retirement
in a more effective way then we would be
more likely to make all kinds of decisions
today that would make our real future selves
much happier.
While we cannot morph people into a
representation of their future selves, it’s
clear that most people struggle to envisage
themselves in retirement unless it’s in a very
general way.
The work we do to encourage people to
save must take account of this. When we
communicate with people about the need to
save we should concentrate on the here and
now. This means focusing on the practical
steps they can take to help them plan for an
income after they have finished work.
Your future
self feels like
a stranger
5
“I work part-time for a
supermarket and they
are going to enrol me
into their workplace
pension scheme. I don’t
earn much money but I
still wanted to know my
options. Can I trust them
with my pension money
because if they ever went
bust they would take
the pensions, including
mine? I was thinking
about paying money into
a private account”
Caller to The Pensions
Advisory Service helpline
http://www.npr.org/2012/04/11/150424912/your-virtualfuture- self-wants-you-to-save-up
After the nudge: A pressing engagement with pensions
13
Positive engagement
Investigating attitudes to long-term savings highlights
the need to reconsider how we communicate with
people and how we adopt a more motivational style
of engagement.
By looking at the engagement challenge in
terms of how we shape behaviour, we shift
the focus of communications away from
merely providing facts and information and
towards a consideration of the wider context
in which people act.
To more fully understand what this means in
terms of the types of communication people
respond to, we commissioned a scientific
investigation into the psychology of savings
and emotions.
We used a benchmarking questionnaire
with 2,000 adults, representative of the UK
population, to establish people’s views of the
emotions around saving. This was followed by
a laboratory experiment using neuroimaging
technology to measure the brain’s response
to information about saving.
While more than three quarters of
respondents claimed to be saving for the
future, 42% of people said they felt anxious
about their future financial situation.
The study included the neuroimaging exercise
because we wanted to understand what goes
on below the level of conscious awareness.
In the same way we know that people use
14
After the nudge: A pressing engagement with pensions
the same part of their brain that considers
attitudes towards strangers when we ask
them to think about their older selves, we
wanted to measure changes in the brain
when respondents considered savings so
we could gain a deeper understanding of
emotional responses.
We published our findings in our report
‘Saving in mind’.
What we found was that using
a positive tone and highlighting
a pleasant retirement, when
combined with practical steps
for taking action, was by far
the most effective approach in
motivating people to improve
their savings habits.
A positive tone, in fact, created a
doubly effective approach than a more
scaremongering or negative tone. Not only
does a positive approach drive higher levels
of motivation, but it also makes people feel
less satisfied with current levels of saving.
We believe this is because it acts to bring the
future into focus in a non-threatening way,
motivating and empowering people to take
steps towards realising that ideal future.
In other words, we may be able to overcome
the inbuilt inability to perceive ourselves as
older, retired people if the positive messages
we receive paint a picture of a retirement
we want to strive for, combined with well
signposted actions that can empower us to
take positive action.
Undertaking the first scientific investigation
of this type into long-term savings highlighted
the need to reconsider how we engage with
people and how we adopt a more motivational
style of engagement.
We should communicate about
long-term savings in a concise
and positive way.
We need to give simple, practical
steps to show people the action
they should take next.
Tools and advice can promote
higher levels of confidence and
optimism which gives people
greater engagement with
their planning.
Communications ought to be
as short and simple as possible
with a consistently positive
tone to reinforce the impact
of the messages.
All of this points to frequent messaging with
smaller, more easily digested pieces
of relevant information.
After the nudge: A pressing engagement with pensions
15
The neuroimaging laboratory-based
work gives great insight into the
approach needed in order to make
our messages as motivational as
possible. Applying this insight to
how we effectively communicate
the savings message provides
practical ways for us to help shape
better choices for people.
We researched the reactions to eleven
different communication strategies. They
were all designed with the same purpose
– to encourage employees to save more
into their pension – but they used very
different images, messages, headlines and
recommendations on next steps.
The research reinforced the neuroimaging
work we had commissioned. The most
motivating communications were those
that adopted a softer, more positive style of
message and which clearly signposted the
fact that small increases in monthly savings
can make a big difference.
The key findings were:
1. People are clearly media-savvy and can
distinguish quickly the tonal differences
across different styles of communications.
The vast majority conclude that a softer, more
positive approach is vital to motivate them
and encourage them to think about their
retirement and their savings.
2. It’s important we are clear in what we are
talking about. For example, using the word
“investments” clarifies the topic.
The term “savings” can easily confuse
or mislead as the reader is unsure whether we
are referencing short-term or long-term savings.
3. The majority of people prefer to see
photographs used rather than illustrations.
They are seen to be more emotionally
appealing as they make it easier to connect
with the image of a real life person and a
photo is perceived as being warmer and more
personal than a graphic representation.
4. As well as making the communications
material positive and emotionally appealing,
it’s important to signpost clearly how to start
saving more. For this reason percentages can
raise barriers. It’s much better to highlight
what an extra “£50 a month” can achieve
rather than “an additional 5% of your salary”.
5. Employees do not respond well to feeling
pressurised into making decisions about
their pensions. We found that the more
hard hitting routes we researched
inadvertently prompted people to reduce
their pension contributions by presenting
savings goals as unattainable which led
to a “why bother” mentality.
If we take these lessons to heart then it is
vital to ensure the message and experience
are consistent and integrated whatever
communication channels are used, and to
provide a consistent, integrated brand and
user experience.
Using positive style of messages,
which signpost clearly that small
increases in monthly savings can
make the big difference
16
After the nudge: A pressing engagement with pensions
Shaping positive outcomes
People don’t need to be engaged to be auto-enrolled but
from that point on, the journey of engagement starts.
For automatic enrolment to succeed
we must not only encourage people
to save enough for retirement,
but we must also make sure they
are equipped to make the right
choices at retirement.
If automatic enrolment is seen as the very
start of a journey of engagement then
towards the end is the point at which people
take advantage of the new retirement
freedoms. As mentioned earlier. the new
choices people will have at retirement mean
they will need to make difficult decisions
around a variety of options in how they take
their savings.
To minimise the risk of people making poor
decisions at this point, the government is
implementing its Guidance Guarantee. This
promises to give everyone the opportunity
to access free and impartial guidance and
is clearly going to be a key step in ensuring
people are well enough informed to take
their retirement savings in a way that is taxefficient and sustainable.
However, the reality is that people will need
to start making decisions about retirement
many years earlier. What people plan to do at
retirement will make a difference to how and
where they should invest their money 10–15
years before retirement. So the real challenge
is how to engage people in retirement planning
before, as well as at and engage people in
retirement planning before, as well as at and
perhaps during retirement.
It is our view that retirement planning must
be regarded as part of an overall journey of
engagement that encourages people to make
active decisions soon after the point at which
they start to save.
“I had a works pension
for 17yrs. In December
2012 I transferred it
to a private scheme. I
have regular statements
and updates on my
investment but I have
no idea if my pension
is doing well and
whether I have done
the right thing. I’m
totally clueless when
it comes to pensions.
I’ve just received a new
statement but I don’t
understand it. Would
you be able to give me
some help?”
Caller to The Pensions
Advisory Service helpline
After the nudge: A pressing engagement with pensions
17
Time to engage
The opportunity to change perceptions
towards saving is now.
A strong savings culture can only be
created through engagement with
people who feel they are playing an
active role in shaping their future
and one in which they feel there is
a positive reward for their behaviour.
Everyone involved in pensions communications
needs to take this “positive engagement”
approach to heart.
The psychological dynamics behind savings
patterns are complex and ingrained. By
considering what emotions we are trying to
evoke, what visual techniques and tone we
are using and reflecting the dynamics at the
centre of the relationship people have with
their money–and their perception of their
older selves, we can start to navigate our way
towards a much more robust savings culture.
One with positive engagement at its core.
The time to start this engagement
strategy is now.
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After the nudge: A pressing engagement with pensions
Every day large numbers of people are starting to
save for a pension for the very first time.
We have the opportunity to ensure that this is not
a false start for them that begins and ends with the
initial enrolment.
The challenge for us all is to engage these new savers
with the need to put money aside on a regular basis
and encourage them to take an active role in their
retirement planning.
After the nudge: A pressing engagement with pensions
19
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