Pensions, financial literacy & motivation

Anne Seiersen

Danish Insurance Association

EGFE 4th of June 2010

Agenda Pensions, financial literacy & motivation

What we know

What we don't know

What we are

doing

The road

ahead

Side 2

What we know about pensions and financial literacy

Report: Financial Literacy and Transparency Initiatives and Tools in Life and Pensions

•  The knowledge on pension issues is low among consumers

•  Politicians and consumer associations ask for more, more detailed and more simplified information.

•  All research and surveys show that the more the consumers know the more satisfied they are with their pension scheme and their pension provider

•  But consumers are not using the numerous information sites and web tools developed

Side 3

What we know about pensions and financial literacy

Find the report here:

www.forsikringogpension.dk/Analyser/Documents/towers_perrin_report_skaerm.pdf

Side 4

Findings in the report

•  The pension landscape is very diverse

•  The way financial literacy questions are prioritised and dealt with depends on the general pension agenda

•  Changes in pension systems, auto-enrollment, the relative weight of the three pillars of retirement income.

•  Best practices – well known to this audience, but not in Denmark

Side 5

Basic facts about the Danish pension model

•  flat rate public pension with a supplement depending on other income – poverty prevention

•  occupational pensions - replacement

–  mandatory by collective agreement

–  covering 80-90 per cent of labour force

–  replacement rates in combination with public pensions are 60-80 per cent

–  defined contribution, contribution rates of 12-18 per cent of the salary

–  retirement, disability, death, critical illness

•  individual pensions - flexibility

Side 6

What we know

•  Most consumers do not know or care about their pensions

•  Many consumers do not try to understand

•  To what degree are you interested in topics related to pensions?

Side 7

What we know

•  90 per cent are in (self perceived) good control of their personal finances

•  All in all I think I have good control of my personal finances

Side 8

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Meget enig Enig Uenig Meget uenig Ved ikke

Pct.

Alle Mænd Kvinder

What we know

•  But more than 1/3 are unable to cover a minor unforeseen expense

•  I always have enough money saved to buy for example a new refrigerator (in cash) in case the old one breaks down

Side 9

0

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15

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35

Meget enig Enig Uenig Meget uenig Ved ikke

Pct.

Alle Mænd Kvinder

What we know

•  …and just half have in the last couple of years examined, if they can get better (i.e pay lower) interests on their loans

Side 10

0

5

10

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35

Meget enig Enig Uenig Meget uenig

Ved ikke

Pct.

Alle Mænd Kvinder

What we don't know

How do we:

•  motivate consumers to take an interest?

•  get consumers to use our webtools?

•  make consumers aware of the gap between what they think they know and what they actually know?

What is fair and realistic to expect of consumers ?

•  regarding knowledge

•  regarding interest

Side 11

Side 12

What we are doing www.PensionsInfo.dk gain an overview of your pension

•  Easy to use – log on through your webbank

•  Provides an overview of total pension benefits in

–  public pensions

–  ATP (Labour Market Supplementary Pension Fund)life insurance companies,

–  life insurance companies

–  pension funds

–  civil servant pensions

–  banks

Side 13

What we are doing Consumer Plan 2010

•  Our focus is to enhance transparency

•  Consumer Plan 2010 supersedes the DIA plan from 2006 with 18 initiatves to create openness and transparency.

•  Consumer plan 2010 with the following elements:

–  Better overview: Consumers will be given better opportunities to compare products and companies

–  More clarity: About rules and rights

–  Empowering consumers: Projects about financial literacy, motivation and education

Side 14

Consumer Plan 2010 Better overview

•  Facts about pensions – a new web tool to compare pension schemes and pension providers

•  The pension overview – a standardised resume of annual pension statements given to the customers

•  Pension APR (Annual Percentage Rate)

•  "Cost-meter"

•  Pension terms – standardisation of the most important pension words

Side 15

Consumer Plan 2010 Empowering consumers

Projects about:

•  Financial literacy – a study/survey concerning the level of the Danes financial literacy – baseline study

•  Motivation – research on what motivates consumers on the financial markets

•  Education – a pilot about about ways to strenghten consumers financial literacy by means of education

Side 16

More about motivation

•  Lack of motivation = a barrier for consumers to engage actively in pensions

•  No motivation – no action

•  Our tools receive good evaluations – but are not used a lot

•  3 examples: What can we learn from them?

Side 17

Example 1 - The Jam experiment

•  Taste booth in a supermarket

•  First experiment: 24 different taste variants

•  Second experiment: 6 different taste variants

Side 18

Example 1 - The jam experiment

•  Many options attracts attention

•  Many options reduces action

Forsikring & Pension | Titel Side 19

Stops Tastes Buys

Many options

60 % 1,5 3 %

Few options

40 % 1,38 30 %

Example 2 - Save More Tomorrow

•  SMT raises retirement savings – the employee set aside a part of future salary raises

•  Help employees who wish to save more – but lack the will power.

Side 20

•  SMT turns something negative to something positive:

–  Loss aversion: Participants don't experience lower salary

–  Procrastination: Once in, you have to take action to get out

–  Self-control: You oblige your self to save later

Example 3 - Electric bills and smileys

•  What happend when US consumers received information about the relative size of their bill:

–  Above average => reduces consumption

–  Below => increases consumption

–  Below and use of => unchanged consumption

Forsikring & Pension | Titel Side 21

Summing up motivation

•  Free to choose – political buzzwords

–  how much choice should consumers with low financial literacy have in complex markets

•  Save More Tomorrow – the Danish pension system is paternalistic

–  a way to overcome lack of motivation

•  The use of norms

–  electric bill: People generally like to fit in and do 'the right thing'

Side 22

The road ahead

•  How do we motivate consumers?

–  Which hurdles are hardest to overcome?

•  Which information channels are essential?

–  In Denmark we have relative success with the site www.pensionsinfo.dk – you can access it easily through online banking

•  How much can we expect from consumers?

–  How high should you reach?

–  How do we set the goals?

Side 23

The road ahead

•  Joint responsibility for increased financial literacy

•  Financial sector: Responsible for creating transparent markets and inform consumers in a way they understand.

•  Consumers: Responsible for trying to understand

•  Politicians ans authorities: Responsible for making room for financial literacy in the educational sector and for creating confidence

Side 24