Simplifying the saving process for consumers is key to increasing their engagement in pensions, according to The Behavioural Insights Team (BIT).
Speaking at the PLSA annual conference, BIT director of consumers, economic growth and energy, Elisabeth Costa, claimed that the current system is too complicated for consumers to make smart savings decisions:
“When people are confronted with a complex choice set, they tend to become paralysed and they will either not make a choice or will make a poor choice.”
In an effort to find out whether engagement can be increased by simplifying the standard “wake up pack”, which is designed to inform the consumer about pensions and can be up to 100 pages, the BIT tested the “pension passport”.
Costa added: “Replacing that [the wake up pack] with a one side of A4 paper, what we saw was this had a huge impact on how engaged customers were.”
According to BIT's research, almost 11 per cent of customers who received the pension passport visited the Pension Wise website, in comparison to just 1 per cent of those who didn't. The study also found that there was a three-fold increase in the likelihood of people calling the Pension Wise hotline.
Furthermore, BIT found that the people who received the pension passport were around 24 per cent more likely to say that the information prompted them into action or reflection, while they were also 13 per cent more likely to say that knowing who to speak to was easy, rather than hard.
This has led to support from the Financial Conduct Authority in rolling out the pension passport across the industry.
Costa also claimed that defaults are key to helping consumers get the most out of their savings experience.
Research has shown that savers tend to stick with the default contribution rates, up to 11 per cent of pay, and they also tend to follow default asset allocations.
Costa said: “We all have a strong tenancy to go with what's set for us. Making an option a default makes it much more likely to be adopted. It's extremely important at the enrolment stage, but also the defaults that we set there tend to stick through the accumulation phase.
“So people are sticking with the default contribution rate and people are sticking with the default asset allocation.
“If people have been asked to choose their contribution rate, many people say that they would have selected a higher rate. There's been a very interesting recent study where the authors found that, even at higher default rates, people weren't opting out of their pensions, this was done in the U.S.”
BIT believe that more needs to be done to improve consumer engagement, through prompts and smarter defaults, and that there are “huge untapped opportunities to apply behavioural insights across the pensions journey.”