How do people make pension choices? Professor Henriëtte Prast speaks during the APG Summer Course - an inspiration meeting for directors of pension funds - about the application of insights from behavioral economics in the customer journey.
By using proper communication and offering appropriate choices, the behavior and attitude of a customer or, more specific, a pension participant, can be guided. Emotions, evoked by language, play an important role in this process. Says Henriëtte Prast. And in order to properly arrange a customer journey, one has to know the psychological, cognitive, emotional, cultural and social factors of human (financial) decisions, according to the professor. “You first have to know how people think and act when it comes to their financial journey”, Prast explains.
What is the most crucial insight from behavioral economics pension funds should start working with?
“The fact that people, when it comes to making complicated choices, drive on intuition instead of on rationality and that setting aside money is systematically postponed. Even if people have all the knowledge in the world, know that pension is important and want to have a good pension. The way in which choices are offered therefore has a major impact on what people will “choose”. The key to success is to make the “right choice” easy. This is mainly due to the fact that intention does not translate into behavior which, consequently, makes it irrelevant to influence the intention by means of education and information.”
And how do you guide people towards making the right choice?
“There are several ways to achieve this.
First: offer the “right choice” as the silent choice. In other words: silence means assent. If you want people to set aside money for their pension, you can achieve this by offering them a solution in which they save automatically, unless they opt out. Take a self-employed person, for example. Now, if a self-employed person doesn’t take action, he/she is not setting money aside. That system should be adjusted: a self-employed person not acting, is setting money aside. And he/she must actively opt out should he/she not want to save for a pension.
Second: respond to emotions using language. We have to start reaching people in a different way. Pension funds now communicate with rational information: factually correct, not misleading and understandable. When they talk about pension accrual, they use words from a concrete domain: war, battle, build. But we have to start wondering what works for what target group. Ask yourself what image is portrait by language. If it evokes a positive association, it increases the interest in pension, but otherwise it repels participants. And the pension communication is actually not considering the above.”
Other options are:
How progressed in fact is the pension industry in applying the principles from behavioral economics?
“I only see few convincing examples. That will partly, but not solely, be due to the fact that the government and regulatory authorities set out rules based on an outdated model to raise awareness.”
Communicating with participants is not always easy. The Dutch are “consciously unconcerned” about their pension and do not read their pension communications. So, how can we reach them at all?
“Communication is not the solution if you don’t offer meaningful choices. The goals of pension communication are clearly described. And one of these goals is for the participant to know what choices he/she has. What should you be thinking about? For example, I am of opinion that my pension is insufficient in the low scenario. So, I would like to make the choice of hedging that downside risk. This cannot be done by extending the work life in due time, as the pensionable age also is the mandatory retirement age. Save more? But then I would have too much pension if the realistic scenario or the windfall scenario comes to pass. Moreover, what should I invest the money in? I am not following the course of my pension fund, because, in that case, the value of my money would actually decrease in the disappointing scenario.
The only example of a choice I encountered is: choose to retire early. That could be the case if your pension outlook is more than sufficient - a luxury situation. And you can always decide later on whether or not to retire early. In short: why spend time on reading information if there’s nothing to be gained from?”
The APG Summer Course is an inspiration meeting for pension fund managers of funds that are clients of APG. During this summer school we challenge administrators and ourselves with new insights from "outside".
One of the speakers was Henriëtte Prast: professor Personal Financial Planning at the University of Tilburg and an expert in the field of personal financial planning and the role of feelings and emotions involved.