Employer contributions should be 'reframed as free money' - Columbia Threadneedle

Savings biases can be altered by changing how we think about pensions, for example reframing DC scheme employer contributions as “free money”, Columbia Threadneedle pensions experts have said.

Speaking at today’s launch of The Future Book – unravelling workplace pensions, Columbia Threadneedle head of pensions and investment education Chris Wagstaff discussed how more people could be encouraged to take a more active approach towards their pensions.

The pensions expert noted that people do not respond well to being told what to do, especially when they are told what to do with their own money, and that people do not react well to policy makers trying to change behaviour by scaring them into submission.

A key challenge for the industry, he said, is to nudge people into recognising the importance of their pension savings and the inadequacy of a state pension and minimum contributions into an occupational scheme.

“Addressing the inadequacy of retirement provision in the UK has arguably become the nation’s number one socio economic challenge,” Wagstaff stated.

While considering this inadequacy, Wagstaff discussed five key trends that arise. These include: increased time spent in retirement - with people spending an additional seven years on average, the state pension being paid later, the disappearing DB schemes which have pushed individuals to assume more responsibility for their future with their DC pots and the continued prospect of more modest investment returns and yields.

“All these together and what you have is that the consequence of making a wrong decision or of making no decision at all, and inertia is a very powerful bias, means that people are in danger of suffering particularly poor outcomes in retirement.

“Now these strong headwinds are further compounded by the fact that very few individuals in society, especially those that are reliant on DC pots are woefully, inadequately equipped to make a good financial decision as to how to achieve a good financial outcome,” he said.

Wagstaff continued to suggest that the lack of engagement is a result of behavioural biases. These are the “present bias” which is the preference to spend today rather than saving for tomorrow, partly due to the fact that people are unable to visualise their future selves.

The second is anchoring whereby people “latch onto a wholly irrelevant number and use that as a reference point within their decision making. Anchoring within pensions tends to occur when members of workplace pension schemes anchor to the minimum contribution which they mistakenly believe that their employer, or in the case of auto-enrolees that the government, has endorsed as being adequate to provide a good financial outcome in retirement.”

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