According to a study by the European Insurance Association Insurance Europe, almost half of Europeans do not have private pension plans. But why do so many people fail to sufficiently prepare for old age?
It can’t be because of a lack of desire for security, because this desire is quite pronounced with most people, sometimes even to an increasing extent. There are frequent references to budget shortages, but even this explains only a small part of the gap in private pension plans. So, what are the reasons for the failure to take preventive actions?
Behavioral Economics provides answers with the central finding: Your customers’ decision-making processes are often irrational and influenced by many factors.
The search for approaches to close the gap between the desire for protection and its actual implementation begins with analyzing barriers and drivers in the decision-making process.
Five provision barriers and how to overcome them
Barrier 1: “Present bias”
We live in the here and now. From an evolutionary perspective, this behaviour has kept us alive for thousands of years. However, an overly strong fixation on the present is rather obstructive for purchasing a pension plan product whose advantages lie in the far future.
Possible driver: Automation of pension plans
This is one of the most powerful, if not the largest, drivers. Because it immunizes against almost all barriers. How does that work?
It’s simple: The decision to take action is made only once. After that, there are no further decisions and, therefore, no barriers to overcome. Rounding up the amount to the next Euro or 5 Euros and automatically saving up the difference with every payment, especially cashless payments, is a typical example. Even a money transfer order for an ETF savings plan falls into this category.
Barrier 2: “Hyperbolic discounting”
The dominance of the here and now is reinforced by the human tendency to underestimate financial advantages that lie in the future because we discount them disproportionately in our minds. In terms of retirement provisions, this means: The ‘cash value’ of future payment flows is perceived so low that it represents a barrier to the conclusion of a pension plan.
Possible driver: “Anchoring” with timely benefits
If we are to disproportionately discount everything that lies in the distant future, the obvious remedy is to create timely incentives.
Digital solutions, such as apps and dashboards, can show me at any time how much I have achieved and what I could do with it today.
Barrier 3: “Sticking to options”
Especially the Spotify and Netflix generation likes to keep their options open – as many and as long as possible. Being tied to a retirement product for several decades is rather a deterrent for them.
Possible driver: Flexible products
Who wants to be bound financially for the next decades?
Flexible products with variable premium payment intervals, the possibility of special payments (e.g., for the investment of bonuses), and the possibility of switching to other investment options help counter the ‘sticking to options’ trend.
Barrier 4 “Projection Bias”
We tend to project our present “state” into the future. Young customers, in particular, find it difficult to imagine what it will be like when they are 67 years or older. They rarely ask themselves questions like: How will it feel later on? What needs will I have? How comprehensive should my financial coverage be?
Possible driver: “Nudging”
Instead of pointing the finger at the social desirability of private pension provision, friendly, regular “nudges” from a bank or other financial service providers can be much more effective. In this area, too, Fintech’s innovative digital offerings are particularly noteworthy. They set weekly goals, send motivating reminders, and—most importantly—there is a lot of praise! We are all happy to be confirmed in our behaviour time and again because retirement planning is a marathon, not a sprint.
Barrier 5: "Paradox of choice”
Customers are often paralyzed by the “embarras de choix”. There are simply too many options for planning ahead, and for fear of making the wrong decision, it is better not to decide at all.
Possible driver: Support customers in their decision
There are several helpful approaches to avoid overwhelming customers with a multitude of options in consulting.
For example, a clearly structured small/medium/large offer presentation can give the customer orientation. Even “defaults” in the form of an intelligent pre-selection can help the customer in the decision-making process.
In conclusion, it must be said that behavioral economics does not deliver the longed-for “silver bullet” that solves all problems at once and closes the gap in retirement planning. However, it shows a variety of approaches to encourage people to make continuous provision for old age. For more information on how to imply drivers into your business or industry, please contact us.