Empirical evidence suggests that individuals are unengaged with DC pensions. This is demonstrated by the vast majority of DC members remaining in default funds and reluctant to increase contributions.
Individuals have also been found to be inadequately equipped to make positive choices, due to behavioural biases and a lack of financial literacy.
The reaction of much of the DC pension world has been to foster engagement and financial literacy.
In fact, pension funds are encouraged to show that members are engaged. Often regulation requires them to report on engagement, however defined. It is often poorly defined in terms of websites and call centres.
But the evidence is leading some to dispute that members need to be engaged with DC pensions or financially literate in order for them to achieve a good pension. Their argument is that pension funds should focus on better default solutions instead of fighting natural biases and trying to educate members.
Critics of this argument contend that DC pensions imply that individuals carry the risk, therefore they must take ownership. This means they need to have an understanding and involvement in their DC journey.
It is easy to be swayed one way or the other. As with many things, the truth lies somewhere in the middle. Individuals cannot be expected, on average, to develop an understanding of DC pensions, an intractable financial problem. At the same time, they need basic knowledge to make the choices they will be required to make even in the most paternalistic systems.
One thing that might lead individuals to become truly engaged with DC pensions is a sense that their act of saving for a pension has a wider societal purpose.
This is not just a matter of giving savers the opportunity to invest in a responsible manner.
Savers have a stake in investment decisions that is larger than the size of their individual pension pot at retirement. They must see proof that financial markets work for society, by channelling investment towards productive companies, assets and projects.
Many pension funds already have well-established ESG and impact-investing policies that underline their commitment to marrying purpose with long-term return potential.
But the industry as a whole should keep striving to achieve its transformative potential as a steward of capital. Pension funds must represent the collective voice of their members, demanding a more productive, fairer and sustainable society.
Carlo Svaluto Moreolo, Senior Staff Writer,
carlo.svaluto@ipe.com
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