Joe Jordan, senior vice-president of MetLife, explains the role of behavioural economics in helping to persuade people to save for their retirement.
The UK is on the brink of “probably the single biggest implementation of behavioural economics, certainly in the financial sector, that’s been done yet”.
That is the view of Tim Jones, chief executive of Nest Corporation – the man who, along with the government and The Pensions Regulator, will be in charge of ensuring that auto-enrolment is a success.
Auto-enrolment is projected to encourage five to nine million people to either start saving into a pension or to increase their saving and should be a major step towards tackling the UK’s problem of failing to save for retirement.
Why you need to know about behavioural finance
However it is a major challenge where behavioural economics – which essentially seeks to explain why consumers do not always behave the way they should and provide solutions – will have a crucial role to play.
Auto-enrolment is being launched at a time when record high stock market volatility, record low interest rates and record low annuity rates have cast doubt on the track record of pension saving as a whole.
This fact is crucial when you consider that auto-enrolment will bring in a whole new group of savers – mainly on low to moderate incomes – who will be particularly sensitive to negative commentary.
Understanding the role of behavioural economics in helping to persuade people to save for their retirement and the strategies they should adopt and avoid is crucial in helping advisers develop their businesses for the long-term.
Advisers will be well aware of the power of apathy and inertia in dictating retirement income outcomes. Clients are bombarded with negative information from all sides ranging from the impact of volatility on their pension funds and the impact of low annuity rates and inflation on their retirement income.
Retirement income solutions are subjected to forensic scrutiny, which inevitably highlights their shortcomings while downplaying the advantages of saving for retirement.
MetLife’s own research in the UK has shown general dissatisfaction with pension outcomes. Our report – “10 Years to Save Your Retirement” – last year found two-thirds of over-50s either did not know or did not believe they would have enough income for a comfortable retirement.
Connecting with clients
The key point about MetLife’s report was that it was possible to save for your retirement and that is the key message for advisers connecting with clients.
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The increase in minimum AE contributions has had little impact on opt-out rates - with cessations after April increasing by less than two percentage points, data from The Pensions Regulator (TPR) shows.
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