Pension Awareness Henriëtte Prast & Arthur van Soest, Tilburg University & Netspar Funded by Stichting Instituut GAK through Netspar
Overview Motivation What does pension awareness mean? Pension awareness in the Netherlands and other countries Heterogeneity in pension awareness and expectations Financial education, financial knowledge, pension knowledge Pension knowledge, pension planning and pension decisions Behavioral economics Policy implications Conclusions 2
The Dutch Pension System Flat rate PAYG state pension at subsistence level Supplementary occupational pensions at sector or company level: Mandatory for 90% of employees Fully funded Mostly defined benefit with nominal guarantees Indexation when pension fund reserves allow Third pillar mainly matters for self-employed Tax advantages (premiums tax deductible; pension income taxed Ranks second after Denmark according to Mercer Global Pension Index (2013) 3
Reforms and Recent Changes State pensions: 2012 reform: State pension eligibility age will gradually increase to 67 in 2021 and will be linked to life expectancy after that Occupational pensions: Generous early retirement schemes abolished No indexation in most occupational pensions Nominal cuts in 2013 and 2014 More flexibility at an actuarially fair price Current plans ( New pension contract ): Purchasing power rather than nominal guarantees Defined Benefit but risks partially go to consumers More individual responsibility; better communication; New arrangements for self-employed ( 2.5 pillar ) Less generous tax treatment of 2 nd and 3 rd pillar (lower thresholds) Pension awareness is needed to make consumers better able to make their own decisions in an optimal way 4
Motivation (in the Dutch context) Lower guaranteed mandatory pensions for consumers More own responsibility Low pension knowledge Little interest in pensions, particularly among the young New communication tools (UPO (2008) & Pensioenregister (2011)) Amendments to pension law: more participant oriented communication Similar issues in other countries 5
What does Pension Awareness mean? Definition used for the Dutch Pension Awareness index: Four aspects: (1) Knowledge of their old age pension (accumulated amount, expected income, survivor pension, disability insurance) (2) Knowledge whether this is sufficient in their personal situation, and, if necessary, (3) Knowledge of what can be done iabout this if necessary (4) Considers taking action if needed Pension awareness is a tool to help achieving an adequate pension and is not a goal in itself. Knowledge Insight Action 6
Pension Awareness in NL 2009-2011 (Wijzer in geldzaken 2012) 7
Heterogeneity in pension awareness Groups of employees with higher pension awareness: Active role employer Men High educated Older High earnings Higher financial knowledge in general Higher income groups are also more satisfied with their pension arrangement than lower income groups. Employees in the construction sector are less satisfied than others. 8
Comparable heterogeneity in expectations of the system: Survey questions Dutch adult population: What is the probability that 20 years from now the purchasing power of supplementary pensions in general will be Lower than now.% At least 10% lower than now.% Higher than now.% At least 10% higher than now.% 9
Expected purchasing power of Dutch supplementary pensions in 20 years time 10
Similar questions on the average retirement age in the Netherlands in 20 years time 11
System expectations and background variables (Bissonnette & van Soest 2012) Women are more pessimistic (that is, expect higher retirement ages and lower benefit levels) than men Higher income groups are more pessimistic than lower income groups Higher educated are more pessimistic than lower educated Married people are more pessimistic than others No unambiguous relation to age, labour market status, or sector 12
Medians of the retirement income replacement rates Dutch workers (Bissonnette & van Soest 2014): Lower for higher educated, higher incomes, women 13
Pension knowledge in other countries United States, Canada, Italy, Germany, United Kingdom, Ireland, Sweden, Chile, Pension knowledge is quite limited in all countries Positive association with income and education Pension knowledge is higher if retirement is closer But this may be too late for action (particularly if there is mandatory retirement) Towers Watson (2012): Pension knowledge in NL is relatively low and higher in countries without collective pensions 14
Financial education Politicians, policy makers, and the financial sector take it for granted that education aimed at financial knowledge and awareness has a positive effect on behaviour. Many studies into the causal effect of financial education on financial insight and behaviour; no unambiguous conclusion. Lusardi & Mitchell (2013): Research on efforts to enhance financial literacy suggest that some interventions work well, but additional experimental work is needed to explore endogeneity and establish causality Fernandes, Lynch & Netemeyer (Management Science, forthcoming): general financial education helps very little; specific education at the right time helps much more 15
Financial literacy and pensions (knowledge, awareness, planning, and decisions) Alessie, van Rooij & Lusardi (2011), Lusardi & Mitchell (2011), Bucher-Koenen & Lusardi (2011): Financial literacy pension planning (= thinking about pension) Chan & Stevens (2004), Clark et al. (2012), Allen et al. (2013): Pension knowledge pension planning Bernheim & Garrett (2003), Lusardi (2004), Bayer et al.(2008), Clark & D Ambrosio (2008): participation in a pension seminar intention to increase pension savings Van Rooij, Lusardi & Alessie (2012): Financial literacy wealth Willis (2011, 2012): doubts on the effectiveness of these tools to increase the financial well-being of older age groups 16
Limitations (psychology & behavioural economics) Ideally: Education, information pension knowledge pension planning good pension choices But this is not sufficient: Multiple selves (future me is someone else) Elaboration Likelihood Model (two ways of making decisions) Planner en doer (rational versus myopic) 17
Lessons from behavioural economics Framing: influence of context & presentation Procrastination & time inconsistent decisions Disadvantages of complexity (more choice is not always better) Default choices Money illusion (nominal guarantees) Dealing with risk (and overestimating small probabilities) Many other factors than knowledge and information determine the quality of pension decisions Some of these can easily be manipulated: choice architecture 18
Choice Architecture Avoid default choice non participation for supplementary pension Avoid too conservative default choices Enforce active choice decisions Specific products like Save more tomorrow (contribution increases over time but at lower speed than earnings) Deadlines (for example through tax deductibility) Offer a small number of standard choices and avoid complexity 19
Policy implications: what works and what does not work? Financial education; Financial literacy Pension information; Pension information channels Timing: life events (job change, marriage, divorce,...) Personalized Transparency Choice architecture Imposing self-control Defaults for voluntary supplementary saving plans Forcing active decision making Adequate supplementary pension saving as default Account for heterogeneity 20