Many of us tend to focus on today’s financial needs, and bury our heads in the sand when it comes to thinking about saving. Retirement, in particular, can seem such a long way off, while in the present there are so many pressing demands on our money: a new car, house maintenance and improvements, as well as annual holidays and even Christmas presents for the children.
Compounding this problem is our tendency to hope for the best and optimistically believe we’ll earn more money in the future, or even that ‘it’ll all work out in the end’. We also struggle to imagine our future selves – an effect known as the ‘end of history illusion’ – meaning that we may find it difficult to plan because we don’t feel we will change or have different needs from the ones we have now.
On top of this, financial products can be complex, and people struggle to make sense of them, often losing concentration and switching off. The latest statement is consigned to a pile of unread notifications and emails are left unopened.
Why the ‘Autopilot’ approach may not be enough
While some ‘autopilot’ initiatives such as auto-enrolment[ 1 ] and auto-escalation[ 2 ] in retirement savings – inspired by insights from behavioural science – have certainly had huge impacts and made leaps forward in basic participation in savings schemes, they ask nothing from individuals in terms of engagement.
This type of approach leverages a System 1 approach – when behaviour change is achieved by relying on our tendency towards inertia and settling for the status quo, and for choices and selections that require the least effort in both thought and action on our part.
In this scenario, an individual could be auto-enrolled into a pension in their current job, accept the default fund(s) and the default contribution rate (currently 2% in the UK, but increasing over time to an eventual 8% in 2019 ), but have very little understanding or engagement with their pension.
Individuals might not even remember they are enrolled in a pension plan, let alone think about how to optimise it. And not consciously choosing to do something can result in a lower level of commitment and responsibility or ownership.