PensionReforms' summary and comments
When employers (or countries) are re-designing retirement income or saving arrangements, it should be important to understand individuals' current preparations and preferences.  It's possible that they like what they already have and may not 'need' change, especially if they are already doing a good enough job.

For an employer, the need to find out what employees know or need may need to be more detailed than for citizens as a whole.  Employees' preferences will usually drive their interest in new features and the national pension/saving framework will have a significant impact on their interest in changes.  Before employers decide to spend money on new initiatives, knowing whether they represent value should be important.

The report describes a new way of getting at relevant data:
"...we take a closer look at employees' retirement preferences for specific pension plan features to get an understanding of what employees really want.  A novel "multideck" survey methodology which actively engages employees to understand their underlying retirement preferences is used."

The new approach is tested on 6,000 employees working for largish employers in three countries - the Netherlands, the United Kingdom and Germany.  Are individuals rational enough to make appropriate decisions about their retirement saving needs?  Do they need the kind of help offered by strategies based on the principles recommended by 'behavioural economics'?

"A multideck survey has three decks of questions - the first deck is similar to a traditional survey, the second deck - or dashboard - explicitly shows each respondent the outcome of earlier answers and provides the opportunity to revise them, and the third deck seeks to understand why respondents made the changes they did."

The new approach has uses in various kinds of surveys but the report applies it specifically to retirement income issues:
"We first asked the relatively standard questions typically asked in financial planning surveys: information about their desired pension income, retirement age, risk tolerance, and savings rate.  We then used the data to populate a dashboard that allowed individuals to explore trade-offs between contribution levels and benefits and between higher risk and higher benefits.  In other words, the dashboard calculates how closely the respondents' desires correspond with real-life choices.  Where there is a gap, respondents can modify their initial responses in up to 10 iterations to close it."

The authors describe the "core results" of the report's survey across the three countries:
"Individuals appeared to appreciate risk-return tradeoffs in retirement benefits.  And they were willing to pay more for secure benefits.

"But, at the same time, their preferences were highly heterogeneous.  Individuals not only wanted very different levels of replacement rates but also dispersion of replacement rates (risk) to reflect their individual circumstances..."

PensionReforms thinks this shows individuals can be 'rational' when the issues are explained to them in ways that are relevant to their own circumstances.  It also undermines the significance of surveys that, for example, start with an assumed target retirement income applying to all participants; or that assume the employer's saving plans are the only way that employees make provision for their retirement income.

The report's survey took place in April 2009.  That places it in the period after the worst effects of the global economic crisis on investment markets were known (though perhaps still not yet advised in the benefit statements).  The results showed some variation across the three countries:
.  Netherlands: "Of the three interrelated qualities of pensions - certainty, price and quality - certainty and quality seem most important to Dutch employees.  The vast majority of them accrue pensions in defined benefit (DB) systems and want to continue doing so.  The preference for DB plans versus defined contribution (DC) systems is overwhelming.  In addition, employees are willing to contribute more rather than, for example, lower their pension ambitions or retire later to close the gap between their retirement desires and probable outcomes."

. United Kingdom: "Employees in the United Kingdom display a strong preference for earlier retirement and an apparent willingness to make larger contributions to pay for it.  Moreover, their risk tolerance is limited.  However, a large minority remain unable to reconcile their goals for retirement with what they can reasonably expect, with one-fifth of respondents missing their retirement income target even after repeated use of the financial planning tool."

. Germany:  "Generally, German employees are rather risk averse with respect to their retirement planning.  Although German DC occupational pension plans typically offer minimum guarantees, thus limiting the investment risk, workers generally strongly prefer fully guaranteed benefits.  Beyond this, our survey shows that German employees are skilful at optimising their post-retirement consumption, an willing to accept more risk to achieve desired replacement rates."
 
The report points out that the large differences in countries' retirement income arrangements affect employees' attitudes.  PensionReforms agrees: for example, where DB arrangements already play a large role in retirement income provision (the Netherlands in the present case; by contrast with the UK), we should expect perhaps a greater willingness to take chances with supplementary DC top-ups.  The fact that the Dutch apparently want guarantees as part of that deal is unsurprising.  The 'sum at risk' is less relative to the whole and so the cost of the guarantee appears relatively small.  On the other hand, a reason that more UK employees had trouble reconciling goals with resources may be the probably large gap between DB-based entitlements and the large sums needed to provide the required certainty for the 'gap'.  Bridging that may require greater risk taking to make it seem achievable.  Whether savers actually carry through with that strategy is another issue.

The real question is who might provide the underpinning guarantees?  If employers are pulling back from DB arrangements, the only other provider (at a reasonable price) seems to be the government.  The answer, according to the report, is not default enrolment into schemes that don't deliver what savers apparently want.

The report's author is the consulting firm that resulted from the January 2010 merger of Towers Perrin and Watson Wyatt Worldwide. (File size 3.95 MB; 40 pp)  378