The psychology of retirement savings and pensions: part 2

by Joanna Combrink | 29,May,2024 | Actuarial Society of SA, Employee Benefits, Q2 2024

George Brown

Disclaimer. Please note that this article uses very broad generalisation of a painted scenario for the purpose of dramatic effect. Individuals are all different and different circumstances will be relevant to every individual fund, member or service provider.


As players in the pensions industry, our jobs revolve entirely around trying to get people to retirement with meaningful savings. That is the very purpose of our professional existence. That is it. As the “producers” of the retirement system we put time and effort into designing benefit structures which we think members will like and will be valuable to them – flexible contribution choices, flexible investment choices, choices of annuity at retirement and, until “two pots” is introduced, choice around what to do with their retirement savings when they leave employment. We have a beautiful structure full of flexibility so it can suit the needs of every possible member. And we communicate. 

Boy, do we communicate! We have benefit statements and projection statements and all sorts of calculators. We have websites and newsletters and face-to-face sessions. We send emails and sometimes even texts. Sometimes even in different languages. We communicate until we are blue in the face. We give people all the fathomable information that they could possibly need to make the right choices.

And despite all of this effort and all of this available information, the members whom we are trying so hard to serve are not making the right choices! They contribute too little. They encash their savings when they leave employment. They choose living annuities when they retire even if this is not the most appropriate option (and not even in-fund ones which we so carefully select to make sure that they don’t get ripped off by fees from all sides, but rather the one that their cousin / butcher / Tik Toker recommended through a dodgy financial advisor who charges a fortune). And then they draw too much from those living annuities. It is hair pulling stuff.

The question is WHY? Given all of the information that they have at their disposal, why are individuals not making rational choices? WHYYYYYY?

Why we do not make rational decisions?
The field of economics concerns itself with logical and rational cause and effect. It is like conducting an experiment in a vacuum in a lab. The results are very different than if the same experiment was conducted in the real world. Behavioural economics on the other hand, is the “combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications”. Sounds like the real world to me. Here you will find phrases like “Human beings do not always act as economic theory predicts” (do they EVER?) and “Individuals do not always behave in their own self interest” and “The risk that an individual’s behaviour poses to their retirement outcome is an important one”.

These are not strange concepts and we know this from our lives outside of retirement choices – we may rationally know that smoking is bad for us, and will instruct our children to never ever start, even as we light up the next cigarette. This is also why we do not adhere to our chronic medicine protocols. If we are honest, our behaviour makes very little rational sense most of the time. Even to us.

Behavioural theory tries to explain this. According to behavioural theory, when people have to make complex decisions, they may cope with the amount or lack of information by adopting shortcuts or rules of thumb. We don’t CHOOSE to do this, it is just how we are wired.

I have picked out a few which I think are useful.

This is extremely powerful. It means that the first contact, information and experience that a person has with their retirement fund may be responsible for their attitude towards savings, the choices that they make and their ultimate retirement outcomes. And that their first choice will likely be their last.

Yes, we have retirement benefit counsellors who can explain options at the point of exit from a fund. But would it not be more useful to put as much if not more effort into the first contact with the retirement fund which may change the initial and future behaviour and final retirement outcomes?

Framing is the concept that the choices we make are not that much influenced by the actual choice, but rather by how it is presented. For example, which would you rather pick: 75% lean or 25% full of fat?

This means that if the same facts are presented in a different way the outcome will be different. Same facts. Different behaviour. This is also extremely powerful. When we make people fill out forms, we need to bear in mind that comparisons need to be easy; order matters; and no one ever chooses the most expensive option.

If we know that, could we present the information in a way that makes it “obvious” to make the “right” choice?

Peer effects and herd behaviour
Peer pressure does not just happen at school. We often trust or do things because of what everyone else is doing. Behaviour is deeply influenced by the sub-groups in which we function, or put differently, by other humans in our circle. So yes, your fund may be sending you an email saying that you should invest in growth assets over the long term. But if you overhear a conversation at the butcher where someone lost all their money in a market downturn on equities (never mind not actually fact checking that statement) you are likely to put more weight on that human testimony of a total stranger than you are on the written wisdom from your fund.

Availability is the ability to identify with a situation or potential risk occurring. If we cannot identify with it or imagine it, we basically write it off. This will largely be influenced by our surroundings, our family and friends, advertising, media campaigns, publicity, word of mouth and our own experience. We need to face some truths. Retirement is not that often talked about. There is no culture of saving in our country. Financial institutions and retirement funds are more often discussed when they have done something wrong than when they have done something right. We hear of people being broke and running out of money more often than we hear stories of financial freedom and right choices. The stories that we hear are more often are ones or being broke than of financial security and right choices. This is a much more systemic issue. How can we change a culture to a saving one? We need to talk about it at school. We need to create success stories.

Last notes
Given the biases raised above, I think that we need to question whether it is appropriate that we leave decisions which will have huge financial consequences in the hands of members, and whether hiding behind the fact that “we told them” is really a good enough excuse.

If we agree that it is important that individuals have financial security in retirement, and we should discuss whether we do agree on this point, then let’s do our best to make the biases work for them, not against them. What we are doing is not working. So we need to stop procrastinating and move away from our own status quo.

Let’s put people who are passionate about retirement in those first induction sessions to use the effect of anchoring. A “retirement starter counsellor” who can sit face-to-face and one-on-one with a 20 something year old in their first job and say “ooh yes this retirement thing is important – you have 40 years to save up enough money so that it lasts you for the next 40 years that you work without income. So, if I were you I would pick the highest contribution option I could. Yep-that’s the box. And whatever you do, DO NOT touch that money. EVER. It is not for spending. My Uncle Desmond, he just did not and well…”. (of course this would have to be done in such a way as not to actually BE financial advice).

Let’s limit the choices that we give members to ones that are reasonable and where the making of such choices will not jeopardise the outcomes of the system. Give contribution rate flexibility. But only from 15% upward where 17% is the default. Auto-escalation can deal with grandfathered cases. Let’s use auto-escalation to help individuals who have had to downgrade their savings level due to personal circumstances.

Let’s consider whether it is really beneficial to have daily unitisation and immediate access to the most up to date market values for these long term investments.

Let’s frame retirement savings as retirement income instead of “a capital lump sum of what I have saved that I can use for a million purposes” so that the focus is on income continuation. Let’s communicate projected retirement income levels relative to a target so that the numbers are meaningful and given a context. To tell you that your replacement ratio is 45% is not helpful unless I tell you that you should be aiming at 75% and give you options of how you can change it.

Let’s find a way to leverage technology and social media to make retirement savings more relevant. Let’s find a way to communicate rather than produce information.

Let’s find a way to make things better.

Joanna Combrink
Independent Consulting Actuary Deputy Chair at Actuarial Society's Retirement Matters Committee | + posts