By Dale Critchley, Policy Manager, Aviva
It’s about a frustrated, thirty-something, wannabe rock star who starts to hang out with his young (about 12), very straight-laced nephew. The part that was highlighted to me involved the boy being questioned on what he wanted to do when he was older.
His answer – ‘I want to be an actuary’. That led to a confused/angry/comedy reaction from his Uncle.
I get it – a 12-year-old saying his dream career is to be an actuary is unusual. But it made me wonder why that particular line of work was used as the butt of a joke.
Maybe I’m overthinking it.
But it did spark something in me about the way pensions are portrayed, particularly when compared to similar financial products such as ISAs.
How often have you heard a phrase such as ‘rip-off pensions’ with ‘sky-high’ or ‘hidden’ charges. And yet ISAs are almost always described much more positively as ‘tax-free saving’.
There are couple of reasons linked to the product:
1. Pensions are much more complicated than ISAs, especially cash ISAs, in which the majority of people save.
2. Pensions are often in the headlines for the wrong reasons, for example when an employer with a defined benefit scheme goes bust. The thing is, those stories get column inches because they are rare, and because of the impact they have on those involved.
It’s like the statistics on air crashes; we know we’re unlikely to be affected but many of us feel apprehensive as we climb the steps to get on board.
So, why are ISAs the darling of the savings world and pensions often painted as the villain? After all – pensions are more tax-efficient than an ISA. Their charges are more transparent and often lower, and I haven’t even mentioned the employer contribution.
I think it comes down to behavioural biases that we struggle to overcome as individuals, as an industry and amongst the media.
People don’t trust what they don’t understand. The fear of the unknown served us well as hunter-gatherers. It saved us from being eaten or eating the wrong thing. But it means that unless we take the time to understand complicated rules, investments, taxation etc, then we’re going to struggle to trust pensions.
Another issue is that humans can’t cope well with long-term planning. 53% of US respondents to a survey said they rarely or never think about something that might happen to them 30 years from now .
We consistently tend to opt for immediate rewards instead of a greater return down the line (hyperbolic discounting). Then there’s the fear of regret - you’ll never be disappointed if you don’t plan!
More research, this time into brain activity , has revealed that when we think about our future selves, we actually think about a different person. Why save in a pension if we feel that someone else is going to get the benefit?
Compared with the instant-access ISA the pension has an uphill battle. At Aviva we’ve tried showing people a picture of their older self to increase engagement. We also provide a forecasting tool that promotes the same. We won’t give up explaining pensions in ways that people (and journalists) understand, in order to promote trust.
We can’t change human nature overnight. But given all the benefits of a pension, I think those who understand them, and can take an analytical approach, will have the last laugh!
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