Saving and a frugal approach to life is easily preached. But as decades of ever-increasing loans and credit card debt have shown, the British have never been good at living within their own means, or putting aside money for a downturn. In fact, figures showed a marked increase in credit card debt during the financial crisis and there have been ongoing discussions about how this problem can best be addressed - with the country's new coalition government now suggesting ‘nudging' its citizens into place.
The idea of nudging is simple - rather than presenting a strict framework of complex rules and regulations, a person is coaxed into better behaviour by means of various incentives. An oft-cited example, for its odd appeal, is to decorate urinals with paintings of flies to encourage men to improve their aim.
However, the principles can also be applied in other everyday situations that take you out of the bathroom and into the workplace, as the UK's National Association of Pension Funds (NAPF) believes. It argues that the creation of the Behavioural Insight Team by David Cameron could be used to modify pensioners' saving habits, averting a situation where people simply neglect payments, "which could lead to millions of people facing poverty in old age", says its chief executive Joanne Segars.
Workers not saving sufficiently for their retirement, which with ever-changing demographics is now set to last longer than any previous generation, is not only a problem in Britain.
At the Irish Association of Pension Funds (IAPF) it was suggested that defined contribution schemes should include a default mechanism to increase payments if the fund were not performing as well as hoped. David Harney, chief executive corporate business, Irish Life, said that workers had a false sense of security if they made regular payments but did not take into account the actual value of their savings.
However, while most would agree that saving is a wise approach to take, research in America warned of the dangers of an overly cautious attitude to saving, which led to consumers denying themselves goods they felt they wanted.
A paper by Anat Keinan and Ran Kivetz cautions that, while people found themselves suffering from buyers remorse, the opposite could also be true. The regret of not indulging, which they termed hyperopia, was predicted to be a longer-lasting feeling, compared with the regret of indulging, which would fade and instead only leave pleasant memories of the pampering or extravagant purchase.
The relevance for this to pension savings is to strike a balance - or, at the very least, find an attractive way of presenting savings that can adequately provide for decades of retirement.
The book said to have inspired the UK government's move towards nudging, ‘Nudge: Improving Decisions About Health, Wealth, and Happiness' by Cass Sunstein and Richard Thaler (who now advises Cameron), suggests that the idea of ‘choice architecture' is key to these new developments. The thought is not a new one and it is familiar from the way publications and stores lay out their products, giving the most prominent place to something they would like you to buy.
The authors therefore argue that changes to the layout of a cafeteria, making fruit the first thing people see, will increase fruit consumption. Similar principles could be applied when pitching pensions to employees. Rather than listing them at the bottom of the many benefits, a prominent placement could ensure they are seen as the main benefit of the vacancy.
Transferring behavioural economics ideas to auto-enrolment, which will be introduced in Britain in 2012, should mean an improvement in the amount of money saved in comparison with opting in to a pension scheme, as Beshears, Choi, Laibson, and Madrian argue occurred after the introduction of auto-enrolment in the United States.
It is said that, as with many complex decisions they might not fully understand, people will deliberate put off making any commitments. This is easily solved by automatically placing employees in a default fund, perhaps even modifying the investment strategy so that it shifts with age as is already the case in some Swedish retirement systems, and in India.
The real question is whether the NAPF's call to action is not a bit late. Since auto-enrolment is already on the way, should we not wait to see if it works before trying to alter behaviour that has perhaps already changed?