Katie Martin, Managing Director, ideas42As someone who is fascinated by human behaviour – and specifically why we often don’t make decisions that are in our own best interests – my interest was piqued when the Chancellor announced his plans to shake up the retirement income market in last year’s Budget. Increased choice is usually heralded as a good thing for consumers, but what impact does it have on their behaviour?
Insights from the behavioural sciences can help us understand this. As we explain in our report, Freedom And Choice In Pensions: A Behavioural Perspective, too much choice can sometimes overwhelm consumers. Even something as seemingly simple as buying jam can become difficult when there’s too much choice: one experiment found that consumers were ten times more likely to actually make a purchase when there was a display of just six types of jam, than with an assortment of 24 flavours. Similar results have been found for a wide range of different products, from investment funds to health insurance.
But too much choice is just one factor that has been proven to influence behaviour. When we turned our attention to the issue of at-retirement decisions we uncovered a multitude of different behavioural barriers that can impact on the choices people make. For example, people are much more likely to avoid tasks that are difficult or unpleasant, especially when they provoke fear - which goes some way in explaining why consumers often leave it to the last minute to start thinking about how they’re going to fund their retirement. We also let small hassles get in the way of reaping large benefits, which could lead to low take-up of Pension Wise or not shopping around for pension products. And, as we know from our own lives, we can often make short-term decisions – partly because we find it so difficult to relate to our future selves. When presented with the option of withdrawing your savings at 55 - when your retired self still feels like distant dream - will people be able to resist the temptation to spend their pension pots on things that provide immediate benefits, like holidays and new cars?
While we throw up a lot of issues in the report, the advantage of this sort of behavioural analysis is that it allows us to identify small changes in the decision-making environment that can have outsized effects on behaviour. We can then begin to design better policies and communications that take these psychologies and contextual features into account, and that can help to promote better outcomes without restricting choice.
In the report, we set out some of the measures that that the Government, regulators and industry might deploy to improve outcomes. But these are just a starting point; there’s much more that can be done to understand the decision-making context and to design effective solutions. And, because small details can make a big difference when it comes to human behaviour, is also important to test behavioural interventions to make sure they have the intended effect.
For these reasons, the recommendations we offer are simply the first stage of an on-going process to identify the most effective ways to help consumers make better decisions about what to do with their pension savings.
Katie Martin is Managing Director of Ideas42.