The science behind retirement saving that we can’t ignore
Schroders Portfolio Solutions Team
The challenges to provide ageing populations with a financially secure retirement are well known. Individuals are having to take more responsibility and risk to achieve comfortable lifestyles in retirement, yet many do not participate or save enough in retirement savings vehicles. We argue that to ensure retirement savings systems are sustainable, inclusive and able to provide future retirees with financial security requires a deeper focus on behavioural science and for insights to be considered in all aspects of retirement savings design.
Introduction
Traditional economics assumes that people are rational. They take decisions to maximise their utility, and they correctly update their opinions and beliefs based upon new information that is received. It relies on there being little room for irrational behaviour.
In contrast, decades of research have shown that how people actually behave is significantly less rational. In fact, human psychology can limit an individual’s ability to make decisions in their own best interest. There is also growing evidence that when people make decisions based on irrational biases they do so in predictable ways.
There are over 20 behavioural biases, many of which work in tandem with each other.
Common behavioural biases
| |
Biases |
Description |
 |
Inertia |
Behaviour that leaves individuals to avoiding change and not taking any action, often as a result of feeling overwhelmed and under-confident |
 |
Present-day |
The tendency to regard retirement saving of lesser importance than more immediate needs or short term goals |
 |
Optimism |
The risk that individuals under-estimate how much they need to save for retirement |
 |
Regret aversion |
The propensity for individuals to regret a decision they have made so much so that it prevents them from not planning for their retirement |
 |
Over-confidence |
Where individuals place more confident in their judgement and abilities than can be justified |
 |
Anxiety |
Tendency to worry and be daunted about retirement, triggering off negative emotions |
 |
Projection |
Assuming future tastes, preferences and requirements remain the same over time |
 |
Herding |
The extent to which individuals are influenced by group behaviour and social norms, whether negative or positive |
 |
Mental accounting |
The process of treating sources of income and wealth differently, often as separate buckets |
Behavioural intervention examples from around the world
Arguably, the most important objective for industry stakeholders has been to expand access to and increase participation in retirement savings vehicles.
Across the world many governments and fiduciaries have adopted the use of ‘nudges’ which refer to any aspects of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives. Nudges have been particularly useful in many sectors/situations where decisions are complex and difficult to translate or understand.
For ease of reference, we set out some examples of successfully deployed strategies using the Behaviour Insights Team framework EAST. This sets out four principles for applying behavioural insights effectively in the real world.
In this paper we investigate those most common in retirement planning, explore what has been done to date to help mitigate against these, and consider the opportunities for further improvement.
