It's a convenient excuse – we all vow to save more when we earn more. A new survey by YouGov for Zurich UK of British adults in work found that more than two fifths (42 per cent) said that earning more would encourage them to save more into a pension. Unfortunately, they rarely actually do it.
A behavioural study, conducted by neuroscience specialist Mindlab in conjunction with Zurich’s survey, discovered that people only consider saving more money for up to a month after they receive a pay rise. This, they conclude, “means there is just a small window of opportunity for people to change their savings habits when affordability improves, and put a little more aside each month.”
The idea of delaying saving into the future is comforting because it involves no sacrifice in the present. This isn’t just because today’s working age people are frivolous – real median pay declined by 10.4 per cent between the end of 2007 and the end of 2015. But there is something about sacrificing a chunk of our monthly paycheck which even the most prudent of us find so difficult.
A pressing problem
This is a concern because as defined benefit pension schemes become rarer, and more of us are expected to save for our own retirement, self-directed saving is more important than ever. What is particularly worrying is the normalisation of waiting for our next paycheck. ING’s latest international survey into savings shows that people in the UK are increasingly comfortable with the amount they have in savings (40 per cent), but that 32 per cent have less than three months’ wages saved.
We’ve seen real success with “nudge” schemes designed to increase pension saving. Mandating employers to offer auto-enrolment, an opt-in system which sees UK employers match pension contributions for their staff up to a certain percentage (currently 1 per cent but rising considerably between now and 2019), has seen huge uptake. Like a student loan, which is repaid through PAYE, we never see our auto-enrolment contribution leave our bank account, so we don’t feel like we have sacrificed anything.
A push in the right direction
Even if people do save more money once their pay increases, they may not be saving more as a percentage of their overall income, as Mindlab’s managing director, Duncan Smith, pointed out. “People think that they will save more of their income if they get a pay rise. Many think that this is the case when they actually increase their savings amount but this research shows that the proportion of income saved, on average doesn’t change,” he said.
Initiatives such as Save More Tomorrow (SMT), designed by US behavioural economist Richard Thaler, encourages savers to commit beforehand to saving a fixed percentage of any future pay rise into their pension. Last year, former pensions minister Steve Webb voiced support for the idea in the UK.
By committing, say, half of any pay rise we receive to our pensions, our overall savings rate quickly increases. The first implementation of SMT found that average saving rates of participants rose from 3.5 per cent to 13.6 per cent over the course of 40 months, assuming four pay rises.
Nudge schemes have been criticised as being too paternalistic. But these assessments largely ignore the fact that you can opt out of them if you wish. And, critically, they avoid the need to understand pensions jargon, which acts as a barrier to entry. An Aviva survey published yesterday found that 22 per cent of UK adults say they know what a defined contribution pension is, fully 4 per cent fewer than the number of people who could explain football’s offside rule.