How being human stops you saving into a pension

If people value what they have now more than what they may get in the future, how can you get them to save for their retirement? Dale Critchley explains.

Modern humans have been on the planet for 200,000 to 300,000 years, whereas pensions have been around for less than 150. Little wonder then, that in evolutionary terms we’re better suited to hunting and gathering than contributing and investing. So, what can we do about it?

Ask someone what they think about pensions and they might use words, like ‘complicated’ or ‘hard to understand’. Unfortunately for pension saving, that plays straight into our fear of the unknown. Historically – and prehistorically – this is a fear that has saved us from being eaten or eating the wrong thing. But when we fast forward to the present, it means that unless we take the time to help people understand pensions, they’re going to struggle to trust them. If we want people to have the confidence to make their own decisions about long-term saving, financial education is a clear must.

We can’t recognise our future selves

Another prerequisite for making decisions on pensions is an ability to plan long term. This isn’t something that humans do well either. 53% of US respondents to a survey said they rarely or never think about something that might happen to them in 30 years [1]Footnote 1.

A study [2]Footnote 2 by UCLA social psychologist Hal Hershfield suggests that we think of our future selves in the same way that we think of strangers. That’s a problem when it comes to planning for retirement. After all, why would you save money for someone you neither know nor recognise?

So, what can we do about this? Research has shown that bringing a vision of the future self into the current makes a difference. We carried out an exercise where we showed people a picture of what they may look like when they are older. Suddenly that stranger from the future became more relatable, making the people we surveyed more willing to engage with their pensions.

Why we tend to choose ‘a bird in the hand’

Yet another obstacle to pension saving is our consistent tendency to opt for a smaller immediate reward, rather than a larger one somewhere down the line.

Referred to as ‘hyperbolic discounting’ by behavioural experts, this idea is summed up by the old proverb ‘a bird in the hand is worth two in the bush’. It’s a premise which certainly stood us in good stead when food was hard to come by and it made good sense to stick with what you already had. But does it still hold true now? The whole idea of pension saving is to forgo the bird in the hand for the prospect of a flock in 40 years’ time.

But not all the psychology is against us.  The human brain constantly looks for familiar patterns and finds comfort in what it recognises. This promotes both inertia and neophobia, a fear of the new. Anyone who has tried to give a new food to a two-year-old will have experienced neophobia first hand. But once we can get over that initial hurdle, inertia keeps us doing the same thing. That two-year-old may only eat three different meals, but so long as they’re healthy meals they’ll be fine. The same applies to pension saving, and it’s the principle of inertia that’s kept people in automatic enrolment schemes for the past seven years. 

Getting past the fear of the new

So inertia can be a friend of saving; but before it can come into play, we need to overcome that stubborn initial reluctance. An initiative known as Save More Tomorrow (SMT) has proved successful here.

As we’ve seen, people tend to value what they have now over what they could have in the future. Yet, this can make a future commitment easier, as you’re not giving up something you already have. A feeling humans find especially painful.

Again, the behaviourists have a name for this: loss aversion. With Save More Tomorrow, we avoid this because we’re committing to give up money we haven’t earned yet. And that's an altogether less unsettling prospect.

By using these ‘biases for good’, combined with inertia, we can get people to commit to higher levels of saving, and deliver a better retirement. It’s often said SMT hasn’t been taken up much in the UK, but the 10 million plus who’ve been auto-enrolled and committed to increases in contribution from 1% to 5% show what a success it can be. Even though we are only human.

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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