auto-enrolment, financial capability, financial services industry, future selves, later life, long term saving, pensions, present bias, Stereotypes, stigma, workplace pensions
by Dr Hayley James, Prof Debora Price and Dr Tine Buffel
How people save for later life has become a critical question, especially in countries which depend on a state/private mix for provision of adequate late life income. In the United Kingdom, the state pension provides only minimal protection against poverty, second tier pensions providing for adequate incomes are provided principally through workplace saving. Yet, despite a relatively new system of ‘auto-enrolment’ designed to encourage people to save into workplace pensions, an estimated 12 million people in the UK, approximately 38% of the population aged between 22 and the State Pension Age, are not investing sufficiently in their pensions to provide themselves with accepted levels of income adequacy as they age. It is not clear why people are not engaging with saving for later life.
Much work on this issue has come from behavioural economists, who posit that present bias influences adults’ propensity to save. Present bias, or time inconsistent preferences, means that people prefer to have something now than later, and it has been suggested that the greater importance put on immediate benefits prevents people from saving for the future. Some researchers have argued that people who feel connected to their future selves are more likely to provide for them through saving, thus overcoming present bias, and this has resulted in recommendations that priming people to think about their later life would increase pension saving. This idea has gained traction in the pension industry even though there has been little evidence to support their effectiveness in practice, and little understanding of why these biases might operate in the ways that they seem to.
We set out to investigate how people anticipate the future when they make decisions about workplace pensions, considering whether they thought about later life at all; if so, how they conceptualised it; and how these views shaped their saving behaviour. We investigated this issue through in-depth interviews with 42 full time employees aged between 20 and 50 years, working for three large employers (over 10,000 workers), operating in the hospitality, fashion and design and finance industries, which had already fully implemented auto-enrolment in the UK and offered employer matching above the minimum levels. Using a small number of organisations limited contextual variation while still providing an opportunity to recruit enough participants and to compare findings. This meant that the population of potential participants was relatively privileged in terms of income, stability of employment and access to workplace pension saving, offering the possibility to understand the extent to which ideas of later life influenced workplace pension-decision making amongst those who were most likely to be willing and able to save.
The experiences of these participants highlighted three important points which add depth to our understanding of present bias in pension decisions. First, we found that later life was considered to be a distinct and uncertain phase in the long-term future. The framing of this issue took two key forms, which were an inability to comprehend the long-term future and/or discomfort with the topic of ageing. Both of these forms drew on the stigma and stereotypes of later life, relating to the negative cultural constructions of ageing in the UK. What was really interesting was that these pessimistic narratives of later life were pretty much common to all participants, even those who paid more into their pensions.
Second, we found that while retirement was identified by participants as an integral part of later life, most participants were unable to predict what retirement would be like for them. In particular, they were not sure whether they would actually retire, continue working in the same field, or do something completely different. This reflects changes to the institution of retirement in the last 30 years, which have eroded the accepted script for retirement. Participants did not suggest that this change was a bad thing in itself, yet it meant they could not base their pension saving decisions on their expectations of retirement. Again, it was noted that this was true even for those who were saving at higher levels. These findings underscore the extent to which pension decisions are disconnected from any thoughts about the future, highlighting the role of socio-cultural constructions in generating this disconnect.
So how did participants make decisions about their pension? We found that people focussed on what they can afford in the present, prioritising stability and current standard of life over long-term saving. What individuals thought was an acceptable standard of life varied, but this was not just about prioritising consumption but also saving and investments that provided stability earlier in their lives. Even the people who saved suggested they did so because they felt they can afford to without jeopardising their standard of living. This suggests that the focus on the present is not a bias but rather a conscious course of action in response to the perceived uncertainty of the long-term.
This calls into the question the expectation that people can plan for and think about later life. The participants in this research were unable to really make decisions about pension saving that connected to their future plans, an outcome that we believe would be at least equally found amongst less-privileged groups. The result is that everyone effectively relies on saving as much as they feel able to, which does not guarantee any sort of adequate income for later life and means that people who are already privileged are more likely to save for their future. We therefore argue that what has previously been identified as an unconscious ‘present bias’ is instead a conscious and culturally constructed mechanism that embeds everyday structural privileges into long-term savings. This deserves urgent attention from policy and industry.
Hayley James is a Research Associate, Debora Price is a Professor of Social Gerontology and Tine Buffel is a Senior Lecturer at MICRA, the Manchester Institute for Collaborative Research in Ageing, at the University of Manchester.
For further details about this research, please see the full article in the Journal of Aging Studies.