24 June 2013
Back to news homeNobel Laureate Robert Merton, distinguished professor of finance, MIT Sloan School of Management, and Shlomo Benartzi, co-chair of the Behavioral Decision-Making Group, UCLA Anderson School of Management, were joined by other leading international academics and industry figures at the second NEST Forum, held in London on 24 June 2013, to debate how to empower consumers to make better choices at retirement.
Director general of the ABI, Otto Thoresen, highlighting the ABI’s Code of Practice, said the Code worked for people coming up to retirement now, but called for a new approach for future generations. He highlighted the challenges facing future generations and pension providers, including the pressures that increased life expectancy would bring, with implications for long term care, and the impact of current debt on their retirement pot. He also said that improving communications was essential for improving consumer knowledge, indicating that 36 per cent of people do not currently look at the ‘wake-up packs’ that are sent to them ahead of their retirement.
He said: ‘We will need a new approach for consumers and now is the time to start thinking about this. We have started work on clearer disclosure of costs and charges, and a better 'bank account' style of statement for employees and other pension savers. It is vital that we continue to upgrade the ‘plumbing’ of the retirement industry as we aim to improve the outcomes for the current generation of retirees.’
Read his paper: Customer engagement in the annuity market in 2013 (PDF)
Paul Johnson, director, Institute for Fiscal Studies, revealed research that suggests men aged 50-60 underestimate cohort life expectancies by two years, while women underestimate this by four years. Many in the study underestimated the chances of both dying young and living to a very old age. He suggested that people find it hard to engage with the idea of how long retirement will be, with a majority underestimating their life expectancies. His research also indicated that today’s pensioners were now the least likely age group to be in poverty, with less than 20 per cent in this category. This is a stark change from the 1960’s where over 50 per cent were deemed to be in poverty. However, he suggested that this was leading the younger generation to neglect saving for their future as they think ‘they will be alright’ by the time they reach retirement.
In his keynote speech Robert Merton, distinguished professor of finance, MIT Sloan School of Management, spoke about the need to provide only meaningful information and choice to consumers, when they want it, saying: ‘Don’t talk to people about the value of their fund as this doesn’t mean anything to them. Instead talk about their retirement income.’
Those approaching retirement should also be given signposts about their pension pot if it looks likely to miss the original target. He added: ‘Save more, retire later, or increase risk, are the three options available if people's retirement income isn't on track.’ He called for individually tailored strategies that should work in circumstances where the member engages and also when they choose not to.
Read his paper: Applying life-cycle economics (PDF)
In her breakout session Hazel Bateman, director, Centre for Pensions and Superannuation, Australian School of Business, explained that Australian pensioners lacked understanding of the benefits of annuities. 'Only 37% in Australia understand life annuities,' she said, adding: ‘individuals show scant interest in life annuities and other longevity products.’
Hazel Bateman also said that financial education was essential, indicating that improving ‘real world’ financial literacy was a challenge for the industry, confirming Otto Thoresen’s earlier point that the industry would have to adapt to changing social conditions amongst retirees.
Read her paper: Disengagement: a partial solution to the annuity puzzle (PDF)
Reform’s chief economist, Patrick Nolan, suggested housing and other assets may also need to be combined to provide a strong pension pot. He added that governments must provide a stable policy environment that indicates the responsibilities of all those involved, including the state and the individual. With life expectancy rising Patrick Nolan highlighted research that showed a person who retires at 65 in 2010 has an 85 per cent chance of living for a decade in retirement, 60 per cent chance of two decades and 16 per cent chance of three decades.
Read his paper: You’re a long time retired: making the most of financial and housing assets at retirement (PDF)
Dr Paul Cox, senior lecturer in finance, University of Birmingham, said that the industry had a huge task on its hands on how to address the low levels of pension wealth of current savers.
Read his paper: Private pension wealth among 55-64 year olds in the UK (PDF)
Tom Boardman visiting professor, Cass Business School, discussed a speedometer tool which helps people identify how ‘on target’ they are to reach their retirement goals, and what choices they have in terms of making changes – such as increasing contributions, retiring later or taking more investment risk to put their plans on track. The study uses the slogan ‘spend more today safely’ to reinforce the idea that ‘buying an annuity is a smart thing to do.’
Read his paper: Spend more today safely (PDF)
Professor Shlomo Benartzi, co-chair of the Behavioral Decision-Making Group, UCLA Anderson School of Management, explained in his keynote speech what he described as the journey people need to go on dubbed ‘The Retirement Trail’. He and Elizabeth Corley, Allianz Global chief executive officer, set out goals that all retirees should have in mind when looking for a safe and secure retirement income. Their research found that decision-makers miss about half of the goals consumers care about, and as such should be provided a ‘master list’ to help guide them. They highlighted that in the US 10,000 people retire every day and the vast majority of these focus on a few retirement goals, missing other equally important ones. The research also showed that people often do not realise the length of time they will be taking their pension for.
Following the event, Tim Jones, chief executive at NEST, said: ‘It was a privilege to have so many experts coming together to engage in the debate.
‘It is clear from the speakers today that the industry needs to keep pace with the social and economic factors that are affecting consumers, including the impact of increased life expectancy, and how important engaging with members will be in future decision on retirement options.
‘NEST will provide members who are approaching retirement with clear information that will help them to explore their options and make an informed choice.
‘Our panel of retirement product providers will make it easy for members to access products suitable for their needs and pot size – including for those with small pots. Members can shop around for their retirement income if they don’t choose to buy from NEST’s panel.’
The full list of research papers can be found at www.nestpensions.org.uk