Transcript Sharon`s presentation

Public understanding of risk and its
effect on pension engagement
Professor Sharon Collard
The True Potential Centre for the
Public Understanding of Finance
Pensions Research Network
11 March 2016
@PUFin_Sharon #PUFin @OUBSchool
• About True Potential PUFin
• Understanding (investment) risk
• Through a savers eyes: risk and
pensions
• Practical help – online personal
finance learning
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About True Potential PUFin
Aim to improve the public’s understanding of
personal finance, providing people with the tools to
make sound financial decisions
… and looking at ways to make financial services
work better for people, and to ensure effective
regulation and consumer protection
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What we do
• Free online personal finance modules for the
general public
• Research programme
• Dissemination and engagement
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Understanding (investment) risk
• Consumers generally don’t think about risk as
the mathematical calculation of probabilities
• Understand the risk-reward relationship
• Understand the idea of capital risk
• Risk aversion – ‘reckless conservatism’?
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Understanding (investment) risk
52% of people would prefer to miss their savings
goals than take investment risk (12% would not).
Source: How do savers think about and respond to risk? Pensions Institute, Cass Business School,
2014
68% of people agree ‘It is better to play safe with
your savings, even if investing in higher risk
investments could make you more money’ (18%
disagree).
Source: Attitudes to pensions: The 2009 survey. DWP Research Report 701
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HMRC ISA Statistics, Aug 2015 (Adults)
Understanding (investment) risk
Influenced by:
• Life stage
• Past experience
• How we feel about and respond to events
• Trade offs we are prepared (or not prepared) to make
Can be a shared decision
Makes sense to you, in your circumstances, even if it’s not
‘economically rational’
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‘… [our] basic conceptualization of risk is
much richer than that of experts and
reflects legitimate concerns that are
typically omitted from expert risk
assessments’
(Paul Slovic, 1987)
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In a nutshell
• At best, a basic understanding of investment risk
• Think about risk in terms of uncertainty and
unknowability, rather than mathematical calculation
of probabilities
• A rich understanding of risk
– Other factors are important, but get overlooked
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Unknowability and uncertainty
• People intolerant of risks with certain characteristics:
–
–
–
–
–
Unknown
Uncontrollable
Not easily reduced
The risks have catastrophic (financial) potential, and
Perceived inequitable distribution of risks and benefits
P Slovic (1987) ‘Perception of Risk.’ In: Science, New Series, Vol. 236, No. 4799, pp280285
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Fluid pension landscape
• From paternalism (DB) to libertarianism and
individual responsibility (DC)
– ‘Great risk shift’ (Hacker, 2008)
• Automatic enrolment – the classic ‘nudge’
– But Pension ‘freedom and choice’ at age 55
• Pension taxation
• Move to ‘flat-rate’ State Retirement Pension
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Retirement is evolving
• 49% of DC members think idea of retirement
‘outdated’
• Majority expect to work for longer than parents
• 1 in 5 people have no idea when they expect to retire
– And we tend to under-estimate life expectancy at
retirement
Source: Steps towards a Living Pension, Barclays, 2014
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Through a savers’ eyes:
Are pensions fit for purpose?
• People ‘get’ the risk-reward trade-off
– 72% aware that final value of personal pensions depends
on stock market performance, up from 61% in 2006
(Attitudes to Pensions: The 2012 Survey. DWP Research Report 813)
• But in savers’ eyes, pensions fraught with risks
– May not get back the money invested
– Pension savings don’t make sufficient returns to provide
adequate retirement income
– Principle of deferred gratification doesn’t hold
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Through a savers’ eyes:
Are pensions fit for purpose?
• Tendency to ‘catastrophise’: people ‘see the chance
that their money is at risk as the same as the chance
of losing everything’. (NEST, 2014, Improving consumer confidence in
saving for retirement, p9)
• Reinforced by other risks and uncertainties
– Legacy of mis-selling and mismanagements
– Low trust in longer-term financial products
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Through a savers’ eyes:
Are pensions fit for purpose?
• 27% trust longer-term financial products
– Second lowest - Car Dealers (11%)
• Day-to-day banking 43%
• Food/grocery 65%
Which? Consumer Insight survey, http://consumerinsight.which.co.uk/
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What’s it all for?
• 41% private pension savers have no idea what their
income in retirement will be (Attitudes to Pensions: The 2012
Survey. DWP Research Report 813)
– 21% vague idea; 36% good or reasonable idea
• ‘Rules of thumb’ based simply on current situation
• 58% of consumers worried about the value of their
pension; 68% among 45-54 year olds (Which? Consumer
Insight survey, http://consumerinsight.which.co.uk)
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What’s it all for?
• What is a ‘good’ outcome, and how to get there
– Help with ‘the whole picture’
– Help to work out how much to pay into pension
– Help to work out likely annual income in retirement, from
all income sources
Steps towards a Living Pension, Barclays, 2014
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Practical help?
• Probabilistic projections?
• Pensions Dashboard?
• Digital Passport?
• Online personal finance learning?
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Online personal finance learning
• Managing My Money
• Managing My Investments
• Managing My Financial Journey (April 2016)
• Free of charge, open to all
• Flexible, bitesize learning – to fit in with busy
lives
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Online personal finance learning
Total number
registered
Total number of
learners
Managing My Money
(three presentations)
53,770
27,666
Managing My Investments
(two presentations)
33,802
18,012
Total
87,572
45,678
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Pensions worries
• How do I choose the right personal pension for me?
• What are the new pension freedoms and what do
they mean for me?
• How do I check that my pension plans are on track?
• What’s happening to the State Retirement Pension
and State Pension Age?
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I can now do business with my financial
advisor on a much sounder basis. Well
worth the time spent. John Wills
(Managing My Investments)
An incredibly high quality course, thank you
for opening my eyes and educating me on
investments and pensions! I am sure that in
40 years’ time I will look back to this course
and give my honest thanks again. Diana
Richards (Managing My Investments)
A lack of knowledge about the subject up until now
has caused me to be very wary and even scared of the
world of finance… Due entirely to this course, I am
much better equipped. Christopher Murray
(Managing My Money)
Summing up
• Mismatch between financial services industry
understanding of risk and that of consumers
• More variables than ever in the retirement equation
• In savers’ eyes, pensions misaligned with ‘Security in
Retirement’ and difficult to get ‘full picture’
• Practical help? But many want to ‘save, forget,
collect’
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Find out more
True Potential PUFin: www.open.ac.uk/pufin
OU personal finance: www.open.edu/openlearn/moneymanagement/money/personal-finance
@PUFin_Sharon
@WillBrambley
@OUBSchool #PUFin
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Links to online courses
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