Planning for retirement is often very low on the list of priorities for many employees. Yet it is paramount that they think about their financial future and put a retirement plan in place. It is more important than ever as responsibility for retirement planning progressively shifts to focus on self-direction with the move from defined-benefit pension plans towards defined contribution plans.
The underlying implication that employees know enough to manage their financial affairs is a dangerous one as numerable studies and research articles have shown. The most recent I saw indicated 60% of the UK working population were concerned they had insufficient saving for retirement but only 1:4 had a sense of the savings commitment necessary for their required lifestyle in retirement.
The Holy Grail for any of us concerned with the provision of retirement benefit is finding the key to increasing engagement, through that engagement increasing awareness, and through awareness increasing levels of action among the workforce.
Traditional approaches to financial education focus on reasoning and calculations, for example, illustrating the impact of starting to save early by calculating the additional savings that can accumulate. Apart from the challenges of variable numerical literacy, and the lack of reality that presentation of large numbers can have without context to purchasing power and its relativity to an individual's circumstances, we need to also recognise many people operate in an intuitive and emotional fashion - they tend to follow their gut reactions. Our decision-making process draws heavily on what we actually see, or the imagery that comes to mind.
The use of imagery and emotions is standard in many industries, but less frequently seen in communicating the merits of, and outcomes of, investing in financial products. So the message is simple: a picture is worth a thousand words. Imagery can improve the effectiveness of education and communication efforts. In the academic realm, Hsee and Rottenstreich illustrated this phenomenon in their 2004 paper on saving endangered pandas. They found that people are willing to pay more to save a panda when presented with a photo.
Therefore my second message is to couple the best education and communication efforts with the simplest way for employees to take action. We do know, for example, that simplifying application forms and procedures can have a large effect on the actions taken by pension plan members. More paternalistically, using inertia constructively to auto-enrol them into schemes that they are entitled to can have very positive effects on take-up rates.
Behavioural economics and behavioural psychology show that people will typically find reasons not to save when presented with the jam today, jam tomorrow choice. It is in-built to prefer short-term rewards over long-term gains.
Financial awareness - indeed overcoming financial illiteracy - is a challenge for all of those motivated to address the enormous challenges to society that continued failure to save for retirement represents. Providers working closely with employers is key and, done well, offers commercial benefit to both. But Government has to become significantly more exercised in this arena. A sustained initiative on financial capability and education in the work place, ideally with a significant degree of cross-party consensus, and offering the prospect of programmes that run long-term across parliamentary terms and have time to truly impact, would present a very positive step forward.
Paul McMahon is managing director of corporate benefits at AXA
