Pensions are nothing if not a complex affair, with governments around the world invoking various strategies to try and ensure people save sufficiently for their retirement. It’s vital, therefore, that any advice services setup by the government don’t have unintended consequences, but, new research from the University of Stirling suggests that’s precisely what happened with a new website from the UK government.
The website was launched after a 2015 ruling that gave people the choice of taking a cash lump sum from their pension rather than purchasing an annuity.
“Making the choice about how to decumulate the wealth in their pension pot is a complex decision for most people, which can have profound long-term consequences. In countries such as Australia and the U.S. where pension freedoms have been in place for longer, an interesting trend has developed,” the researchers say. “In those countries, people tend to cash out their pensions rather than choose an annuity which provides a guaranteed income for life and the associated security that brings. Economists have dubbed this the ‘annuities puzzle’ because there is no rational explanation for choosing greater risk and lower returns over a higher paying, sure thing.”
The annuities puzzle
To try and ensure people made sensible decisions with their pensions, the UK government introduced the Pension Wise website to try and guide their decisions. The website advised people to consider how long they might spend in retirement before making their decision, and provided a life expectancy calculator to help.
The researchers tested 2,000 or so volunteers however, and found that this calculator actually prompted people to take the cash lump sum rather than the annuity. The authors suggest this might be due to something known as Terror Management Theory, which suggests people try and insulate themselves from any sense that they haven’t led a significant enough life.
They suggest that the very act of asking people to calculate their life expectancy put them face to face with their own mortality, which rendered them more likely to opt for the lump sum option.
“The UK pensions market has undergone significant change in recent years, with the public now faced with a wider range of choice around a subject which is often perceived as difficult to understand and nor particularly interesting,” the researchers explain. “While the Government’s Pension Wise website seeks to provide information to assist people, the failure to adequately test the effects of the content and tools on the site, such as the life expectancy calculator, has created an unintended bias.”
As such, the researchers urge officials to thoroughly test any such websites in future so that any potentially unintended consequences are discovered before they go live. On that basis, they believe it would be prudent for the life expectancy calculator to be removed from the Pension Wise site, and indeed from the website of the US Social Security Administration, which offers a similar tool.
