Negative behavioural characteristics of people towards savings including ‘inertia', and low will power can be used to get people to save more, an analyst at the Organisation for Economic Co-operation and Development(OECD) suggests.
Barbara Smith, principal analyst at the OECD believes a lack of financial literacy is a major obstacle needing to be overcome in order to foster retirement saving. Research conducted by the firm in the US reveals half of adults and 66% of high school students fail basic economic tests.
Additionally, for the UK Smith says fewer than 40% of respondents are confident when making decisions of a financial nature, while in Australia, 37% of those individuals with investments do not understand their fluctuating ability to go down as well as up.
Speaking at the Association of British Insurers (ABI) seminar last week, Smith pointed to employer provided financial education programmes, along with newsletters, leaflets and one-on-one counselling as effective ways of driving up pension contribution levels within company pension schemes.
Further OECD research suggests as many as half of people are what she calls ‘non planners’ with no strong retirement plans who lack discipline to achieve any goals they set. Smith said people within this category find financial issues stressful and suggested a need to emphasise breaking down of information through the offering of ‘simpler decisions’, with less information and reduced complexity.
Smith added: “Too much choice leads to a choice overload with research showing that participation rates are best when only two funds are offered.”
Research by behavioural economists Richard Thaler and Shlomo Benartzi have shown that those people who increased their 401(k) contributions whenever they received a raise are far more successful at replacing their income in retirement than those who do not.
Workers joining the scheme increased their saving rates in 28 months from 3.5% to 11.6%, according to Smith.
The Department of Work and Pensions (DWP) has notably been in talks with Benartzi, regarding UK pensions.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Gareth Vorster on 020 7968 4554 or email [email protected].IFAonline
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