Will we choose an age of wisdom or foolishness?
In his famous novel A Tale of Two Cities, Charles Dickens wrote: It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.
In a sense, this is the situation facing the global retirement industry. We are now in a situation where we are facing the juncture in the road where we can in fact choose whether we build an industry based on wisdom or an industry based on foolishness.
The situation in Britain
Many people foolishly believe that South Africa is the only country in the world that faces challenges when it comes to retirement. However, we are increasingly seeing cracks and fissures in global retirement markets, markets that were once believed to be benchmarks upon which other systems were based and built.
The UK is one such market, and while it has been a global leader in building a globally renowned retirement industry. It seems as if issues such as auto-enrolment and preservation are also challenges that the UK faces.
The role of auto-enrolment
In the UK, the world of pensions has changed and most workers in the UK will soon be automatically enrolled into a workplace pension scheme by their employers. This is thanks to the Pensions Act of 2008, which introduced new rules for workplace pensions in the UK. These changes make sure that every worker will have a chance to save for their retirement.
Mark Fawcett, Chief Investment Officer at the fledgling National Employment Savings Trust (NEST), said in a release to the media that under the new rules, every employer will have to give their workers the opportunity to join a workplace pension scheme that meets certain standards. Now members will be automatically enrolled, and will have a month to opt out.
If they choose to do nothing, they will remain enrolled in the pension scheme. Prior to the launch of NEST, working people in the UK had to decide if they wanted to opt in to a pension plan or not.
“Our aim is to turn pension funds from a minority sport into a more normal sport,” said Fawcett,
Speaking at the recently held 2016 Sanlam Investments Institutional Insights conference in Johannesburg, Fawcett said that NEST, as important players in auto-enrolment, were given the challenging task of attracting workers who had no previous form of formal retirement savings, to this auto-enrolment pension plan.
NEST was specifically targeting low to moderate income earners. Since launching in 2008, NEST has had to think of unconventional ways to do this, while still retaining its existing membership of 3.5 million people.
Overcoming behavioural biases
“To retain NEST’s existing members, we used tactics to make it emotionally harder for people to opt out by asking pointed questions linked to savings behaviours. For example, would you walk away from free money?”
The result, said Fawcett, was that fewer than 10% of NEST members opted out, with younger members even more likely to stick to the plan. He added that NEST managed to reduce opt-out rates by as much as 25% to 30% as a result of two simple behavioural nudges: loss aversion and procrastination.
“People tend to perceive pensions as boring and confusing, so people often make bad, rushed decisions,” said Fawcett. To circumvent members opting out, NEST tackled members’ excuses, such as affordability - primarily by getting people over their myopic thinking and procrastination and educating them to see the long-term benefits of saving.
Since newcomers to pension funds have little idea of the complicated process of asset management, 99.8% of NEST’s contributors stick with the default investment strategy — but with a difference. Members are defaulted to a target date for retirement initially, but can adjust this later according to their age, and the investment model will adapt accordingly.
Member choice
NEST’s solution offers a limited number of managed multi-asset choices to members based on their appetite for risk, as well as Sharia-compliant and ethical options. The idea, quite simply, is to use behavioural finance to empower people to be “comfortable with saving”. Members can switch between options as they please.
“Attitudes - and hence behaviour - towards volatility, costs and potential losses showed interesting variations,” said Fawcett. “Everyone hates losing money, but conventional wisdom dictates that younger people should take more risks in their early working days. The evidence we found said that the opposite was true. Younger members had a far lower risk appetite than older members and hence were more prone to cutting their losses early and opting out of the plan,” said Fawcett.
We need to be careful here though. While the UK is experiencing difficulties, some of which are the same as ours, there are still challenges that are unique to the South African issue. We cannot simply remove ourselves from our challenges by adopting inappropriate systems.
Editor’s Thoughts:
We need to remember that there are still challenges that are unique to the South African issue. We cannot simply remove ourselves from our challenges by adopting inappropriate systems. What is the best solution for South Africa? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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