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

2 About True Potential PUFin Understanding (investment) risk Through a savers eyes: risk and pensions Practical help – online personal finance learning

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 3

What we do Free online personal finance modules for the general public Research programme Dissemination and engagement 4

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’? 5

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, % 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 6

7 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’ 8

‘… [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) 9

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 10

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, pp

Fluid pension landscape 12 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

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,

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 14

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 15

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, 16

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 year olds (Which? Consumer Insight survey, 17

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,

Practical help? Probabilistic projections? Pensions Dashboard? Digital Passport? Online personal finance learning? 19

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 20

Online personal finance learning 21 Total number registered Total number of learners Managing My Money (three presentations) 53,77027,666 Managing My Investments (two presentations) 33,80218,012 Total87,57245,678

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? 22

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’ 24

Find out more 25 True Potential PUFin: OU personal finance: @OUBSchool #PUFin

Links to online courses 26