Tackling post-enrolment inertia in pensions

I’ll start with a confession: I forgot the name of my workplace pensions provider. A tad embarrassing given that I am literally paid to be interested in pensions.

I’ve conducted behavioural experiments on pension decisions. I’ve advised pension providers on how to use behavioural science to engage with their customers. I’ve run workshops for my colleagues on how they can plan for their retirement.

And yet I cannot even remember the name of my own provider. It’s not like I have a good excuse – I have only two pension pots to keep track of, and I am not digitally excluded.

But I am willing to wager that I am not especially unusual. It’s easy to forget the details when we are not engaging with our pension on a regular basis.

Why does low engagement matter?

I was auto enrolled onto my workplace pension. This is a passive journey: inertia results in a pension. This is now the norm.

Harnessing inertia at the ‘point of sale’ is a powerful way to encourage greater uptake of pensions.

However, if we don’t overcome inertia afterwards, then people may not engage with their pension for decades. This could lead to poor outcomes.

Many of us face an uncertain moment of truth as we approach retirement. Unfortunately, some people end up being disappointed with their pension.

Our consumer polling shows that satisfaction with fees, value for money, and return on investment is materially lower for people aged over 45. This is not surprising.

The challenge facing the sector is to ensure that pension customers are making well-informed decisions about their pension.

Are you contributing enough into your pension? Are your investments in line with your preferences, for example over sustainability? Have you checked that your nominated beneficiary is the right person?

How is the sector performing?

We’ve seen big improvements in the communications sent by the investing and pensions sectors over the last few years. Our mystery shopping assesses the level of transparency in the purchase journey for investing and pensions – and it has improved considerably since 2019.

We’ve also seen new digital offerings entering the market and legacy pension providers developing new apps and websites. It has never been easier to engage with your pension.

That being said, there is much room for improvement. Overall, the investing and pensions sectors still lag other sectors in our transparency analysis.

Providers vary in terms of their ability to engage their customers. Some firms are A-B testing their communications and developing sophisticated strategies to deliver better customer engagement. Some firms appear to be lagging and do not closely monitor customer engagement.

What would encourage us to engage more with our pensions?

Post-enrolment inertia is due behavioural factors.

Our emotional reaction to our pension will determine whether we engage with it. Latent feelings of anxiety – perhaps caused by worries that we have been contributing too little – nudge us to bury our heads in the sand. If you think that engaging with your pension will mean getting a nasty surprise, you might put it off until tomorrow.

Thankfully, there is a well-developed literature on how to communicate effectively with consumers who are choosing not to engage because they are anxious. For example, we can learn from debt advice charities in this regard.

Once we overcome any latent anxiety, we then face anxiety triggered by thinking about our pension.

Thinking about your pension pot involves thinking about numbers, and it comes dangerously close to maths. Even if the provider does the maths for us, we are still expected to interpret the results.

A study by the charity National Numeracy found that 35% of UK adults said that doing maths makes them feel anxious, and 20% said that maths makes them feel physically sick.

Financial jargon can have a similar effect. The combination of numbers and jargon is a potent mix, and the end result is inertia.

In our analysis, the pensions and investments sectors consistently score poorly in terms of using avoidable jargon. We don’t buy the argument that using inaccessible jargon demonstrates ‘expertise’ and so increases consumer trust.

Obviously, it is worth communicating the power of compounding, and the value of diversification. The challenge is to do this in an accessible way (hint: avoid long words with many syllables, such as ‘diversification’).

We’ve rewritten and redesigned some of the most complex pension communications to remove the jargon and present the numbers in an understandable way. It is possible to create genuinely engaging communications, which are far less likely to trigger anxiety and inertia.

Last, one of the reasons we often don’t focus on our pension is our tendency to have present-focused preferences. We might intend to put more aside for our retirement, but we never quite get round to increasing our contributions.

It is possible to mitigate the effect of this. For example, we might allow people to choose to increase their contributions in the future – this has been rolled out under the banner of ‘save more tomorrow’.

As for me, while I do now remember the name of my pension provider, I make no promises about avoiding inertia with my pension. I am hopeful that they do a good job of getting me to engage with my pension over the coming years.

Tim Hogg is a behavioural economist at Fairer Finance.