Governments fearing an escalating pensions bill, from longer-living populations that won't save enough, have eagerly embraced behavioural economists’ prescriptions for re-engineering financial choice. This study uses new empirical research to re-assess the ‘heuristics and biases’ that affect individual savings behaviour, and retirement schemes designed to correct them, such as the United Kingdom's auto-enrolling National Employment Savings Trust (NEST). It begins by observing that most of the misjudgements believed to cause sub-optimal retirement saving – which include under-estimating personal longevity and over-discounting the value of future income – are revealed by experiments that isolate individuals and decision tasks from social context, and rarely compare the types or degrees of judgemental error across different groups. In reality, decision makers can draw on the people, institutions and social practices around them to extend their information and processing capacity, which may help to ease their cognitive limitations and lessen any biases.
The authors, three Oxford-based geographers, investigate these compositional and contextual elements with a series of UK workforce sample-surveys, conducted since 2006. These deliver new insights into long-term retirement saving behaviour, and point to alternative remedies for the inadequacies of individual choice. Chapter 3 probes the extent to which one of the best known responses to financial decisions under uncertainty – risk-aversion – varies with subjects’ socio-economic situation. A large-scale employee survey reveals (among other variations) that risk-aversion is lower for those on higher incomes and with partners who have pension entitlements; is especially high for single women on low incomes; and is generally higher for women than men. Risk-aversion tends to rise with age, but this is frequently offset by increase in income that encourages risk-taking. In Chapter 4 the authors further examine what determines priorities and preparedness for retirement planning, and find that local influences, especially partners and specialist advisers, outweigh the more distant prompting of media, education or generic financial advice.
Drawing on the survey findings, the book then assigns a chapter each to the 20 per cent of the population identified by past research as ‘sophisticated’ investors, and the 60 per cent of ‘naïve’ investors, whose financial aspirations may exceed their capability. Chapter 5 probes the retirement planning of employees in a London investment company, finding evidence that – even when relatively risk-inclined because of high income – they detected an emerging house-price bubble in 2001–07 and avoided excessive reliance on property. But those on lower incomes were less successful at diversifying their property risks, with education and other early-career costs limiting their scope for safer and more liquid investments. Chapter 6 uses a sample of defined-contribution (DC) pension scheme members to gauge how far housing was consciously viewed as a complementary or substitute form of retirement saving. Older respondents, often living comfortably in strongly-appreciated houses, were unsurprisingly keener on property than younger colleagues, who tend to be housing-poor despite high pay. Clear evidence is presented that stock-market instabilities have played havoc with DC pension prospects, and that the previous generation's satisfaction with property as a safeguard for retirement income is not widely shared by those further down the age and income scale. Chapter 7 examines the similarly fraught decision on whether to spend retirement savings on an annuity – and finds a clear (north–south) geographical division within the United Kingdom, as well as socio-economic divisions. Annuities, judged high-risk by life-span pessimists, risk becoming a Home Counties preserve.
The two remaining chapters develop the critique of ‘libertarian paternalist’ behavioural prescriptions for public policy on retirement saving. While admitting that surveys have difficulty reaching younger employees, and the estimated 20 per cent of the population that is low in ‘financial literacy’, the authors offer evidence that challenges the apparently emerging consensus behind ‘nudging’ individuals towards what experts consider the appropriate strategy. Individual differences in knowledge and circumstance may lead to socially unsustainable pension inequalities, despite efforts to steer individual choice. The book's main survey finds no difference in risk-aversion between members of DC and defined-benefit pension schemes – a troubling situation given the contrasting risk profiles of the two designs, with most DC members seemingly unaware they have taken on risks previously borne by their employers. All the surveys suggest that the growing non-state components of pension provision will exacerbate retirement income inequalities, as those on the highest work-incomes save more, get higher returns, and defend defined-benefit arrangements more successfully. Inequality is shown to be reinforced by a high degree of social sorting, as women with pension entitlements partner with similarly entitled males. So Saving for Retirement concludes with a strong case for alternative, more collectively managed retirement systems, which might also widen participation by reducing management costs. The book is an important contribution to research which underlines the need for pension policy and financial education to address people in their socio-demographic context, avoiding undue influence by rarefied laboratory studies.
