Book reviews for The Journal of Pension Economics and Finance reflect reviewers' own views and in no way represent the views of the institution(s) with which they are affiliated.
As the shift toward defined contribution plan arrangements continues across the globe, individuals are becoming increasingly responsible for important financial decisions that will significantly affect their retirement wellbeing. In the book ‘Saving for Retirement,’ the authors tackle this important social issue head on through a clearly written investigation of the drivers behind individuals’ financial decision-making specifically in the context of the UK. Importantly, the authors emphasize the relevance of the environment the choices are made in while highlighting the socio-demographic factors related to several financial decisions. By studying unique datasets from the UK, they craft a compelling case for their integrated approach to studying human behavior. Academics, practitioners and policymakers will find this book a must-read because it provides deep insight into how people approach financial decisions, as well as evidence that ignoring the environment of the decision is a serious error.
The first two chapters provide an important foundation for the book. The book begins by describing why occupational pensions first came into existence and their current role in today's society, as well as a discussion of neoliberalism. Readers new to retirement research will find this background particularly useful. The authors then lay out their approach for understanding human behavior in relation to some of the existing behavioral literature and to financial planning. Academics familiar with these topics will appreciate the care the authors take to build their thesis. By the end of the two first chapters, readers should find the authors have motivated their research agenda well, in addition to capturing the readers' interest to learn more about the research results in the subsequent chapters.
A particular strength of the book is its use of unique datasets to support the authors' main points. Within each chapter, the authors empirically explore financial decisions commonly faced by individuals in the UK, such as real estate ownership, the choice between property and pensions, asset allocation and annuity demand. The authors also examine factors associated with individuals' risk propensities and attitudes toward retirement planning. Many of the results are derived from papers published over the past few years by the book's different authors. Their data analyses clearly support their theory that context and environment matter. For example, the authors find that individuals' region of residence relates to their take-up rate of annuities and suggest that this is evidence that ‘local’ risk cultures exist that help drive financial behavior. Each chapter includes a thorough discussion of the results and the related implications, which helps the reader to understand not only the details but the broader picture. Readers will find the analyses thought provoking. While in some cases the data is too sparse for rigorous statistical analysis, the potential relationships found are nonetheless important as they provide motivation for further research in the area. Furthermore, the authors are always careful to point out any potential data deficiencies to the reader so not to mislead or overstate significance.
The final two chapters address ‘new’ paternalism, current approaches to pension design and methods for improving plan architecture in the future. The penultimate chapter discusses the authors' views regarding ‘new’ paternalism and their opinions may be controversial to some. The authors make clear that they are not convinced that recent popular changes to plan design such as automatic enrollment, automatic escalation and default investment options, like target date funds, are always for the best depending on the way they are implemented. While the chapter may not convince readers to change their position on the worth of these features – especially as individuals tend to have strong opinions on this matter – even those who disagree will find value in the points the authors ask them to consider. As they do throughout the book, the authors use data to support their assertions and warn that ‘new’ paternalism could become authoritarian if not carefully applied. For example, the authors question whether participants can safely be assumed to have tacitly consented to automatic decisions made for them. The survey evidence they present demonstrates a diversity of opinions and expectations among participants regarding their willingness to allow the plan sponsor to take responsibility for or provide advice related to risk in their investment portfolios. They conclude that these varied expectations raise a red flag and this is justification for incorporating adequate consultation with participants related to each automatic decision made for them.
Finally, the authors conclude the book with a chapter that focuses on recommendations for institutional design and policy. This chapter should be of particular interest to policy makers and plan sponsors. The chapter begins with a discussion of the definition of pension adequacy and then proposes solutions to plan design based on best practices. The authors consider both employer ambivalence and the costs of individual decision-making in their approach. Their discussion considers the benefits and challenges of multi-level default settings, the application of ‘gates’ to allow participants access to more sophisticated products and possible ‘hurdles’ to limit access only to participants capable of understanding the more complex options. They also discuss what is effective engagement of participants, among other important points. The book concludes with the authors opinions regarding pensions issues specific to the UK. Readers will find the authors discussions may alter their views of pension reform or at least cause them to reflect more deeply about their positions.
I recommend this book to practitioners, policymakers, academics and those readers new to retirement issues. It achieves an important goal of supporting Herbert Simon's scissors metaphor (1956), which is frequently referred to in the book's early chapters and a basis for the authors claim that environment matters. This metaphor suggests that human behavior is the intersection between intrinsic cognitive capacity and environment. In the metaphor, each of these components represents a scissor blade. Throughout the book, the authors show us the error of overlooking the importance of the environmental blade. In doing so, they promote a more integrated approach to decision-making research. Such an approach should help enhance our understanding of individual financial decision-making and will most likely result in novel ideas for pension reform. Since retirement preparedness is a global problem, a book like this that challenges current methods of thinking is a welcome addition to the debate.
