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Strategist says savers can be nudged into pension plans

Published:Tuesday | September 29, 2015 | 3:57 PM

Canadian behavioural scientist Kelly Peters, the CEO and Managing Partner of BEworks Inc, is encouraging pension providers and policymakers to employ scientifically proven principles to derive higher levels of pension participation.

Peters, who was keynote speaker at the annual pensions seminar in Kingston, said that entities should engage in ‘nudging’, which the behaviourist said is a tried method engaging consumer participation. The seminar is hosted by Prime Asset Management Limited in conjunction with the Private Sector Organisation of Jamaica.

Peters said consumers are likely to make no decision at all when faced with too many choices. They are unlikely to opt in. If they automatically enrolled in a government savings or pensions programme, they are unlikely to opt out, she said.

Just 9.02 per cent of Jamaica’s employed labour are enrolled in pension plans, according to the most recent data from the Financial Services Commission, which reports that are now 423 active private plans with a total membership of 102,222 persons.

Supplementary information provided by Prime Asset Management indicates that the pension sector is already weighing the ‘nudging’ strategy, otherwise referred to as ‘auto-enrolment’. Governing bodies and stakeholders are being asked to consider establishing a default option such as automatic enrolment for members of their workforce.

The global experience is that for employees who are automatically enrolled only a few will cancel the programme.

“This is done with the hope that the members will be forced to realise the importance of retirement saving and to remain in the pension plans in which they have been auto-enrolled,” Prime Asset said.

Peters also highlighted a second behavioural principle, as potentially germane to Jamaica’s case – the concept that concept decision-making powers are influenced by the availability of resources.

One study, she noted indicated that the post harvest decision-making powers of Indian cane workers was different from the low decision-making abilities exhibited pre-harvest when resources were at their lowest ebb.

“It is not that the poor are stupid, but they have limited time and attention to apply to decision making,” she told the forum.

Peters also cited research on why Jamaicans do not save, among them findings that 63 per cent were affected by optimism bias, that is, the perception that “tomorrow would be a better day” in which more resources would be found to meet future needs.

They were also affected, she said, by low returns on savings; wanted to avoid taxes and bank fees; wanted to ensure immediate access to their savings; a fear of financial institutions; short term thinking; procrastination; and impulsive thinking.

Otherwise, she noted that one’s level of education tends not to be a factor in how they behave.

“Education does not really drive behaviour,” she said, citing one study of 100 seminar attendees which showed that only 14 per cent exhibited behaviour change as a result of information received.
“There is a gap between what is said and what is done,” she added.

Noting that ‘nudging’ is about influencing what people do by giving them the right types of choices, Peters said savers are influenced by peer pressure, but that scare tactics — including the threat of poverty in old age — and incentives have equally mediocre results.

Savers are also more predictably influenced by how they earn —  tending to pay bills from regular salaries, to eat out and otherwise splurge with tips and to “buy something nice” with annual bonuses. Workers were proven to save more, she said, when they were paid in four separate envelopes, and were less likely to remove funds from the envelop with an image of their child on it.

Workers were also found, in one set of research, to save 73 per cent more after being introduced to an aged picture of themselves.

As long as individuals perceive themselves as young, there is less likelihood of them saving, but faced with their older selves, their behaviours changed. They were also influenced positively by text messages showing saving balances with a reminder to save, Peters said.