Policy makers are increasingly viewing behavioural techniques as a means to helping people make better decisions and achieve better outcomes, based on evidence showing that behavioural interventions are successful in reducing harmful behaviour. A number of behavioural techniques are now being used in the pensions environment to promote saving.
This report explores the reasons behind people’s decisions and the lessons behavioural economic theory offers policy-makers, particularly in relation to engagement in pension decisions. It does this in the following ways:
- Describing key economic theories and reflecting on how they relate to actual decision-making behaviour, reviewing the available literature on behavioural economic theory and the biases that lead to barriers to engagement and effective decision-making
- Reflecting on uses of behavioural economic theory in policy approaches, particularly in the health sector
- Exploring the retirement saving decision-making process, drawing out the lessons behavioural economic theory may have for these decisions
- Looking at how increased use of digital platforms could be used to enhance engagement in the future.
The report finds examples of where terms from behavioural theory have been applied elsewhere, in order to demonstrate their applicability to pension provision and choice:
- Changes to ‘choice architecture’ (different ways in which choices can be presented) have increased organ donor registration
- Creating new ‘anchoring heuristics’ (how people instinctively assess the probability of something happening) have been used to decrease alcohol consumption
- Financial incentives have been used to counteract ‘present-bias’ (a preference for wanting something now rather than in the future) among smokers.The report then considers particular policy options, based on behavioural insight, which will help people to achieve positive outcomes with their pension choices. They include:
- Default options: Options given to people who do not make an active choice
- Safety nets: Policy mechanisms designed to help those who find it difficult to support themselves financially and are in danger of falling into poverty as a result
- Consumer protection: Legal and regulatory measures put in place to protect people from fraud or poor governance
- Behavioural interventions: Policies aimed at encouraging people to make a decision (or not make a decision) which results in better financial outcomes for that individual
- Freedom: Policies which allow greater freedom to individuals such as removal of tax regulations which prevent people from taking all of their Defined Contribution (DC) savings in cash.
In addition to using behavioural insights, the report considers the role of digital technology in offering new channels for engagement to improve outcomes. The author finds that Digital channels can improve how people engage in a number of ways:
- Continuous access - not constrained by distance or opening hours
- Access to a larger amount of information
- The ability to contrast and compare different alternatives
- Increased scope for personalisation.
However, it is also pointed out that people are unlikely to engage with digital saving platforms if they are disinterested and do not value the importance of saving.
Points to consider
- This report will be particularly relevant to those interested in consumer engagement with either personal savings and/or pensions. It will very useful for those interested in how behavioural interventions can be a useful tool in increasing positive outcomes for consumers.
- This report looks at the evidence into what policy levers are most effective when increasing positive savings outcomes for consumers.
Consumer engagement: barriers and biases - full report