Wednesday, January 03, 2018

Three 'strategic problems' about funding retirement

Behavioural economics is a subject I wished I had studied decades ago. I am a late life convert to the marketing power of the subject. Most people have heard of it in the context of 'nudge' - the way that you can present an option to somebody so that they make the decision you desire.

I am so enthusiastic about the subject that I was asked to review a book, for the MRS Journal, that explains how companies can use the science to improve their marketing performance (The last mile: creating social and economic value from behavioral insights' by Dillip Soman). It is a great book, I suggest you read it.

Why am I telling you this story? Well the best known example of its use is by the UK government to get more people to save into a pension. Basically, you don't ask people but assume they will and only withdraw them if they request that you do. Since most of the population are frighteningly ignorant about the mechanics of pensions you are onto a winner.

Just before Xmas the DWP published a report that partly 'patted itself on the back' for being so smart by implementing the scheme but then identified three 'strategic problems'. It is these problems that interest me as they should you, both personally and professionally.

Here are the problems  

Problem 1. Whilst more individuals than ever before are saving, they are not necessarily engaged with saving nor looking to take greater personal responsibility to plan, and save more, for their retirement.

Problem 2. A large proportion of the self-employed population experience significant gaps in pension coverage and/or other savings for retirement.

Problem 3. Current saving levels present a substantial risk that the retirement expectations for a significant proportion of the working-age population will not be supported. In addition the current structure of automatic enrolment means there are gaps in coverage – notably for those in low-paid multiple part-time jobs and younger workers.

What these illustrate are the limits of 'nudge'. I suppose the crux of the issue is best expressed by the colloquial saying 'you can lead a horse to water but you cannot make it drink'. The next question to ask is 'why aren't they drinking'?

As I have said, part of the problem is ignorance and boredom about the subject. Who the hell wants to spend time, at the age of 30, thinking about pensions that only have value, four decades in the future? This is something that smart marketers can do address. Unfortunately, they are thin on the ground in government, so don't expect this to change.

The other, much more important issue, is the arithmetic of contributing to a pension doesn't add up. Our low wage economy means there just isn't enough money in the pockets of the majority of the population to put into pensions. Simple as that. The time that it is best to invest, you don't have the money. I don't have a solution other than to suggest to the DWP and the finance industry that they should face up to the facts rather than imploring people to save money they don't have. That turns off the target customer and makes you look stupid.

Why have I taken 2 mins of your life to read this blog posting. Because as a marketer you must know about the dynamics of your customer's spending power. Those entering the phase of their life where pension income becomes an important factor in their spending decisions will be increasingly poor. Of course their will always be top end of the spending curve but will progressively become a smaller group. Dick Stroud  

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