Pensioners need a ‘do nothing’ option
Written by Quietroom
Where once there was a default option with the desirable result of an income for life, now there is none. Why nudge people aged 25, but not 65?
Automatic enrolment is the triumph of the nudge. It was a response to the fact that vast numbers of employees were not saving for retirement, despite all the opportunities and incentives to do so, and despite knowing they should. This inaction was illogical, but human. Behavioural economists recognise that we often don’t do what’s financially good for us. And with automatic enrolment, the Government recognised it too.
They’ve changed the default option of ‘doing nothing’, so it has a different result. Before, an employee who didn’t sign up for a pension didn’t get one. Now, they do. They don’t have to keep it, but not keeping it means they have to fill in a pesky form. So they are nudged to do something that’s good for them.
This kind of nudging can be very effective. When a German gets a driver’s licence, they have to tick a box if they want to be an organ donor. When an Austrian gets a driver’s licence, they have to tick a box if they don’t want to. The donor rates are 12% and 99% respectively. This isn’t because Germans are less socially responsible (or less cavalier with their organs). It’s because people naturally gravitate towards the default, ‘do nothing’ option.
Automatic enrolment has been much more successful than predicted, with low opt out rates. Firms have explained that having extra money when you retire is a good thing, that they’ll contribute too, that everyone’s doing it, and that it’s easy. But most significantly, automatic enrolment is just that – automatic.
So, with such a successful pensions nudge under their belt, it’s odd that last month the Government removed the existing nudge for when people actually retire.
In particular, it’s odd to suggest that a nudge to save at work is good, but one to provide for retirement is not. Life during one’s working years is relatively predictable, compared with life after 65. It’s reasonable for a 30-year old to make some assumptions about the next 30 years, but how does a 65-year old plan for the future? If it was so difficult for younger people to make good financial decisions that the Government had to bring in automatic enrolment, how is it reasonable to expect older people to manage?
Annuities may not be working perfectly. But the idea of a default option that provides an income for life is still attractive. Without it, retirees face huge decisions that they are not qualified to make. Of course, one way to improve annuities would be to get everyone shopping around. The reason that 60% don’t bother is that not shopping around is the default option. A great pension reform would be to create a nudge that reversed that. Tick the box if you don’t want to shop around.
Without compulsory annuities or a similar default option, there’s a risk that large numbers of people are going to make really bad decisions about what to do with their pension savings. Maybe annuities can be fixed. Maybe the industry or the Government can invent a new, straightforward way of providing an income for life. Whatever we do, we need to come up with something good, and we need to make it the default option. If we don’t, we’ll be jeopardising the benefits of automatic enrolment.