NEST (National Employment Savings Trust) today held a research event to further explore savers' reactions to volatility and loss aversion, following the launch of the scheme's investment approach earlier this year.
The event was kindly hosted by the TUC.
An audience of pension professionals, industry leaders, academics and think tanks, as well as representatives from consumer and employer organisations, had the opportunity to:
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hear the results of research by DCisions into pension savers' behaviour throughout the recent financial crisis (headline findings below)
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understand more about the research NEST commissioned from Opinion Leader into attitudes and reported behaviour to volatility and loss (headline findings below)
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debate and discuss the implications of these findings for pensions providers and their investment and communication strategies.
Mark Fawcett, NEST Chief Investment Officer, says:
"The research from Opinion Leader and DCisions are valuable parts of our extensive evidence base leading us to investment solutions which recognise that for many of our future members, pensions and investments are new and can be intimidating. The challenge for NEST is to encourage our members to start saving, continue saving and take appropriate investment risk to support them in building a better income in retirement.
When developing NEST's investment strategy our starting point and our first investment belief is the importance of understanding our members. We have developed an investment approach that takes account of their attitudes, aspirations and, in some cases, fears."
Helen Dean, NEST Managing Director of Scheme Development, says:
"All of those involved in pension provision will be facing the challenge of communicating and developing suitable products for millions of UK workers who will be saving for the first time. How concepts such as volatility, loss and inflation are presented in a meaningful way to these new savers will be crucial to improving confidence in saving for retirement.
"The research shared today highlights the challenges providers face, and the ongoing collaboration between academics, consumer groups and providers as we all work towards developing easy to understand communications on pensions and investing."
Key findings from the DCisions analysis of defined contribution member behaviour in the UK immediately before or after the financial crisis include:
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The financial crisis had an impact on pension behaviour, both in terms of contributions and fund switch activity, with 46 per cent in the NEST target group sample - those who share characteristics with NEST's future target group - making a change of some sort.
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More of those in the target group sample stopped contributing: 14 per cent stopped making contributions, compared with 10 per cent in the control group.
Key findings from the Opinion Leader qualitative research into reactions to volatility and loss include:
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Many respondents did not see the value of pension funds going down as well as up as a feature of pension savings: pension schemes were considered to be more like a savings account than an investment.
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Savers have emotional reactions to interim loss including disappointment, anger, helplessness and often surprise and incredulity.
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When participants' hypothetical pension lost value, they wanted to know where the money had gone and who was to blame for losing it.
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A loss in the value of a pension fund prompted such strong negative feelings that participants thought they would take action aimed at avoiding further losses, such as stopping contributions.
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