Inertia in financial planning: a double-edged sword
One of the most powerful ways to get people to change their behaviour is by getting them to do nothing at all. This phenomenon is known as inertia and can, at least partially, explain the success
of the automatic enrolment pension system in the UK. While many doubted the efficacy of inertia,
the system turned out to be an enormous victory for people’s financial wellbeing – with fewer than
10 per cent opting out of the pension programme (compared to the 40 per cent who initially said
they would drop out).
However, inertia can be a ‘double-edged sword’ in pension planning. Research has shown that people who actively make a decision to do something often demonstrate more commitment to their financial wellbeing. For example, people who independently sign up for a pension tend to save more and are more proactive in managing their savings.1,2
The consequences of low engagement with your pension is evident across the board as well as within Nest. While only 8 per cent of those enrolled in the Nest pension scheme have opted out of their pension, fewer than 1 per cent contribute above the default level, fewer than 1 per cent make any active choice of investment, and only around 16 per cent have registered their online account – the mechanism through which they might seek more information, check their balance or make other choices within the scheme. These low levels of engagement suggest that many members of Nest are broadly unaware of how their money is invested and the implications of this inertia on their savings.
How have low engagement levels been addressed and how effective have these initiatives been?
One of the most common approaches to motivating people to invest in their pensions has been by providing tax breaks. The best estimate is that every £1 of tax subsidy leads to a mere 1p of extra saving, and even this is concentrated amongst the most affluent.3,4 Another typical approach to inspire people to take a more active role in their financial futures has involved the development of expensive and relatively ineffective advertising campaigns.5
How can behavioural insights help?
What behavioural science has taught us is that direct and tailored messages are more effective than general ones and that motivation can be harnessed by pulling the right lever. For example, The Behavioural Insights Team tested several message variants to encourage small businesses to sign-up for business advice, including emphasising the financial value and that thousands of others were already doing so. What was most effective was when we told them that they had been selected to receive the message – emphasising that the offer was directly suited to their business. Similar principles in message framing could be applied to inertia in financial planning.
What is RI? What is ESG? And how can they be harnessed to tackle inertia?
Recently, Nest hosted a roundtable to launch their 2018 Responsible Investment (RI) report. The resounding message from their research is that most savers care how their pension money is invested and think that more information on RI would increase their interest in their pension. Interestingly, millennials in particular have demonstrated a keen interest in RI with 43 per cent of these funds being made up by contributions from this demographic.
This interest in RI is consistent with several other recent surveys. For example, research by Barclays (2018) found that 56 per cent of investors are interested in making an impact investment. The Behavioural Insights Team believes that it can harness this growing interest in RI through messages that highlight the environmental, social and governance (ESG) impact of investment choices to improve levels of financial planning engagement.
This is why the Behavioural Insights Team and the Nest Insight unit are hoping to team up to evaluate how ESG messaging can help overcome financial planning inertia by harnessing people’s growing interest in RI. A trial could test whether making the future more vivid and linking it to their current decisions could drive engagement.6 This might include, for instance, showing savers a landscape that could be made possible by direct investing in pensions.
We are hopeful that this new approach will motivate people to contribute more to their pensions and will compliment other solutions to financial inertia.
By Aisling Ní Chonaire, senior advisor at The Behavioural Insights Team.
The Behavioural Insights Team (BIT) is a social purpose company. It’s jointly owned by the UK Government; Nesta (the innovation charity); and its employees. Visit bi.team
to find out more.
1 Benartzi, S., & Thaler, R. (2007). Heuristics and biases in retirement savings behavior. Journal of Economic perspectives, 21(3), 81-104.
2 Madrian, B. C., & Shea, D. F. (2001). The power of suggestion: Inertia in 401 (k) participation and savings behavior. The Quarterly journal of economics, 116(4), 1149-1187.
3 Chetty, R., Friedman, J. N., Leth-Petersen, S., Nielsen, T. H., & Olsen, T. (2014). Active vs. passive decisions and crowd-out in retirement savings accounts: Evidence from Denmark. The Quarterly Journal of Economics, 129(3), 1141-1219.
4 Benartzi, S., Beshears, J., Milkman, K. L., Sunstein, C. R., Thaler, R. H., Shankar, M., … & Galing, S. (2017). Should governments invest more in nudging?. Psychological science, 28(8), 1041-1055.
5 For example: Snyder, L. B., Hamilton, M. A., Mitchell, E. W., Kiwanuka-Tondo, J., Fleming-Milici, F., & Proctor, D. (2004). A meta-analysis of the effect of mediated health communication campaigns on behavior change in the United States. Journal of health communication, 9(S1),
6 Hershfield, H. E., John, E. M., & Reiff, J. S. (2018) Using Vividness Interventions to Improve Financial Decision Making. Policy Insights from the Behavioral and Brain Sciences, 5(2), 209-215.