It is clear that human beings are far from the ideal of homo economicus. Indeed, we make non-optimal choices all the time.
Take pensions as an example. The truly rational, self-interested scheme member would surely read communications sent to him, learn to understand where his pension was invested, and know he ought to be saving more for retirement.
But, because most of us are choice averse and would prefer to put off until tomorrow whatever does not need to be done today, the vast majority of defined contribution scheme members generally accept the default investment option and will rarely make changes to their scheme.
One study conducted among the participants of pension plans for US college professors in the late 1980s - highlighted in Nudge, the best-selling book by Richard Thaler and Cass Sunstein - found the median number of changes in asset allocation over a lifetime was, in fact, zero.
In other words, more than half of the scheme members surveyed made no changes to the way contributions were being invested.
More tellingly, the book noted that many of the married scheme members surveyed as part of the research who were single when they joined their plan still had their mothers listed as beneficiaries.
Nudge suggests we would be wise to design schemes bearing in mind these human failings - and to use them to help ‘nudge' people into taking the right action.
We have such nudges already. The default option is one such example. Lifestyling is another. Both DC scheme features tend to help members choose a better path if they fail to do so themselves.
Of course, such features can always be improved - and none are the perfect solution in every case - but surely if more people end up with a better outcome because of them, that can only be a good thing.
It is for this reason I believe auto-enrolment and the National Employment Savings Trust will be a success.
Yes, some people will be better off not saving at all and simply relying on means-tested state benefits. Yes, there could well be criticisms of how the scheme will work.
But, at the end of the day, how many people will be bothered to opt-out of the scheme - and to repeat this opting-out process every three years?
Is it moral to ‘trick' people into doing what is best for them? Perhaps not. But we should also ask the alternative question - is it immoral not to help the majority of people achieve a better retirement outcome? One would almost certainly say, definitely so.
Jonathan Stapleton is editor of Professional Pensions
E-mail me at: [email protected]
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