Individuals are being asked to take ever more responsibility for their own retirement savings.
Auto-enrolment means that many more people have started saving into a pension scheme: 1.6 million, according to figures from September, and with an opt-out rate so far of just 9%, far lower than most expected.
However, job-hopping, delayed transition to adulthood and other factors like increased debt in older age will put a cap on its effectiveness unless individuals make a proactive effort to kick start their savings.
Just last month, the Pensions Policy Institute (PPI) think tank released a report that claims average earners who save through the auto-enrolment scheme with the minimum contribution of 8% will only have a 50% chance of saving enough for their retirement.
Similarly, earlier this year, a Government report estimated that 12 million people in the UK are not saving enough for retirement.
The PPI report concluded that pushing auto-enrolment further, introducing mandatory pension saving, could help but conceded that policymakers were more likely to opt for the ‘advice and incentives’ route, nudging and suggesting that people put more into pension pots.
If persuading people to save is going to be even part of the solution to our pensions crisis we really need effective financial education. But what is effective?
It’s a question that the fairly small field of personal finance research has long struggled with and one that policymakers may have done well to struggle with a little more. Around the world – and especially in the US – consumer education has been widely touted as the solution to increased retirement planning, even though much research on the effectiveness of interventions has found they result in little if any change in consumer behaviour. (For confirmation of this I recommend Helaine Olen’s recent book ‘Pound Foolish’. I also wrote a post on UK financial education policy which (briefly!) covers some of these ideas here.)
Which is why it was cheering this month to see a study taking the opposite approach.
Writing in The Journal of Consumer Affairs, the paper took an inductive approach, seeking out households that were similar in many ways but had ended up with very different amounts of wealth at retirement: what had the ‘high wealth’ homes done differently?
The researchers considered several different ways that consumers are generally considered to acquire financial knowledge, each considered by some the tipping point to consumer engagement and, ultimately, a wealthier retirement. As well as formal education, they looked at socialisation, self-directed behaviour and how often participants forecast the amount needed to retire.
They found support for a number of their hypotheses. Perhaps most notably, they found that the higher wealth group were far more likely to forecast the money needed to retire, a planning behavior that a 2006 study suggests less than a third of soon to be retirees undertake.
They also found that the high wealth sample were more likely to exhibit generally ‘financially literate’ behaviors, such as using high interest debt such as credit cards carefully.
That echoes previous studies into general financial literacy, which found that those with a higher level of understanding about basic financial concepts also were more likely to save using pension schemes or to do more planning for retirement.
The authors say that their findings suggest that really effective consumer education programs, from the Government or elsewhere, can have a significant impact on behavior and, ultimately, allow many more people to enjoy a financially comfortable retirement.
This is a small scale study, looking at just 291 homes in all, and its structure and research methods, using households in the United States recruited through newspaper adverts and assessing behaviour based on questionnaires, could have had biasing effects and limit the extent to which its findings can be used elsewhere.
However, its inductive approach shows that the retired wealthy have got there, in part, as a result of subtle factors that current retirement education interventions might not account for.
As ILC-UK have suggested in the past, whichever path Government takes to increase retirement planning and saving, education about the options available needs to increase. It also needs innovation; including insights on how people learn about finances and how they can translate that into real increases in retirement wealth.
Lyndsey Burton, is the founder of Choose, a UK consumer information site that covers personal finance and home media and mobile markets.