How does ambiguity affect how we feel about retirement?

Mature woman on sofa with laptop and headphones

Dale Critchley looks at how ambiguity and changing attitudes can affect retirement plans for employees of all ages.

The past year has seen a huge amount of change in the way we think about work, life and our futures, brought on by a challenge that few predicted.

In our latest report ‘Embracing the Age of Ambiguity’ we set out to find out how the increasing ambiguity of modern life affects how people feel about home, work and retirement. After starting the work in February, we carried out more research in August to build a fuller picture of how attitudes changed over that time.

Uncertainty shapes the choices we make

Our study was prompted by a raft of academic research which pointed to ambiguity or uncertainty about future events creating a feeling of anxiety in all of us. For some, that can lead to very real issues, but most of us have coping methods we use to make the anxiety go away.

For example, take a look at these two situations:

  • You’re asked to put your hand into one of two boxes, but not told what’s inside
  • You’re given the choice of taking what you can see or opening the box      

How would you feel? If you’re like most people, both would make you feel anxious.

In the first you have little knowledge. That means you’re likely to run mental simulations of what could be in the box and – for reasons that hark back millennia – focus on negative outcomes.

In the second example, the anxiety comes from having to make a decision based on missing information. And you can throw in the fear of regret and feeling conflicted – you can see what’s available, but you also want to know what’s in the box. The more that’s at stake, the bigger the anxiety.

The choices we make – and the levels of anxiety we feel –depend on our attitude to risk, what we’ve got to lose, or our ability to cope with the scenario we foresee. We might resolve to walk away and not make any choice, to delay a decision, or – in the real world – insure ourselves against the worst case scenario.

How does this relate to retirement planning and what has our research found?

Retirement has become increasingly ambiguous. Predictable private sector defined benefit (DB) pensions have been replaced with defined contribution (DC) pension schemes. The stress of ambiguous costs for employers has transformed into ambiguity over outcomes for individuals. Our retirement age, how much we need to pay in, or even what retirement means are no longer certain.

We should also recognise how knowledge of pensions has changed. Automatic enrolment has created a greater awareness of pensions. Most people have one, and many people will have a good idea they should pay more in. But this creates an uncomfortable conflict between the needs of today and those of tomorrow. 

In our study, we tried to understand whether levels of ambiguity around pension plans have changed as a result of the pandemic. Lockdown, the economic fallout, and the measures put in place to support people across the UK, have all affected our attitudes to life, including retirement and saving.

How did lockdown affect our retirement plans?

Our research showed most people generally have a rough retirement plan. However, we’ve seen every age group to push back their retirement ages during 2020, none more so than the 18 to 24 age group. In February, 42% [1]Footnote 1 of this group planned to leave work before age 65. By August that was down to 28%, with 41% now seeing themselves working in their seventies.

A massive 91% of people in this age group agree they feel like they’ll have to work longer and longer, compared to an average of 78% across all ages.

Our confidence in being able to retire when we plan to has also taken a knock. In February, 69% of people were fairly or very confident of being able to retire when they planned, but this fell to 62% in August. The reduction is driven by a dramatic loss of confidence among younger people. For example, 14% fewer 25 to 34 year olds felt confident about hitting their retirement target with even more dramatic reductions in confidence amongst our youngest respondents.

Despite those in the youngest age group having the biggest capacity to make good on any short-term setbacks, they seem to have imagined the most extreme outcomes. Academic research tells us to expect this. Younger workers have the least dependable data and the most variables to get their head around. Whereas older workers are more likely to be basing their decision on dependable information.

Recent experience may have led to people reassessing their future

As a measure of confidence, we asked if people knew how much they needed to save for retirement. What we saw was that confidence levels fell amongst the under 45s.  And once again we saw a relationship between confidence levels and age, with younger workers showing the biggest drop in confidence.

Only those aged over 45 maintained confidence that they understand how big their fund needs to be or how much they need to pay in. This could be down to increased ambiguity and catastrophising, but another possibility is that people recognise their previous data set has changed. They might have re-evaluated current finances or what they want from life in retirement.  

During 2020, millions of workers have experienced months of what life without going to work might feel like. The furlough system pays 80% of earnings, not the 2/3rds we’ve traditionally assumed we need in retirement, or the £759.20 a month state pension. This may have prompted people to re-assess what they want in later life and question their previous arithmetic.

Impact on attitudes to retirement

The idea of phased retirement resonates with a large majority, showing certainty isn’t always necessary. We found 84% of people plan to semi-retire before leaving work completely, and over three quarters like the idea of a flexible retirement age.

Those with the greatest capacity to deal with uncertainty are most in favour of flexibility. Nearly nine out of 10 more wealthy over 55s prefer flexibility around retirement, and more than half of them see retirement as a way of working differently, rather than simply relaxing.

What can employers do differently?

In contrast to the wide-ranging views about future plans people were incredibly consistent when it came to their views on how much effort they thought their employer put into helping them with finances. Only 25% of workers felt their employer put any effort into helping with general financial planning, rising to 36% when we focused on help with pensions.

So, do employers need to consider doing more?

All the evidence we gathered points to an increase in ambiguity or change in the data available to employees when it comes to planning for retirement. Research tells us that will cause anxiety. This could have an impact on wellbeing, but most people will use the usual unconscious coping methods. We’ll not open that box labelled retirement or we’ll create the kind of diversion or delay we’ve seen in some of our responses (7% don’t plan to fully retire, and a further 7% plan to retire after age 75).

This unconscious – or even conscious – disengagement is a problem if it means workers don’t appreciate the company’s investment in their pension. It may also stop employees recognising the need to retire before cognitive or physical decline forces them to take it easy.

3 steps for employers

  1. Give employees tools and information to help them
    With solid information and tools to help them visualise their future, employees can build a mental picture closer to reality than the worst-case scenario we’re pre-programmed to produce. You can make sure you give your employees enough information to make them comfortable with retirement and recognise it as something to look forward to, not worry to about. Advisers and providers pay be able to offer financial education and online resources to help.
  2. Adopt a pension scheme design that helps people make better decisions
    Make things easier for members by adopting a pension scheme design that helps people make better decisions. Ensuring there is a good quality default investment solution is one area, but the adoption of a matching contribution structure that encourages people toward a reasonable contribution rate is another.
  3. Offer access to advice to reduce anxiety around making the wrong choices
    This is especially important at retirement where decisions are more complex and the outcomes more ambiguous. In the same way as we’re willing to pay to insure against risks and gain peace of mind, there’s a real value in making advice available to people who need it.     

Defined contribution pension schemes are never going to be able to offer absolute certainty. But with uncertainty comes flexibility, which employees have told us they want. By reducing levels of ambiguity to levels people are able to embrace, we reduce retirement anxiety and with it the risk of avoidance, disengagement and guesswork.  Our aim should be to get people to a position where they feel in control of their retirement decision, where they know what’s likely to happen and where they feel comfortable exploring the possibilities.

Download our report (PDF 9.2 MB) on ‘Embracing the Age of Ambiguity’ for more valuable insights now.

Dale Critchley, Policy Manager for Workplace Savings and Retirement, is an expert commentator with over 30 years’ experience in a variety of roles within the workplace benefits market. He is an Aviva spokesperson specialising in issues relating to workplace pensions and is regularly featured in the media.

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