Why People Don't Choose Private Pensions: The Impact of ‘Contagion’
| Author | Bernard H. Casey |
| DOI | 10.1177/138826270300500403 |
| Published date | 01 December 2003 |
| Date | 01 December 2003 |
| Subject Matter | Article |
WHY PEOPLE DON’T CHOOSE PRIVATE
PENSIONS: THE IMPACT OF ‘CONTAGION’
Bernard H. Casey*
Abstract
Pension privatisation requires that people exercise choice. They might have to choose
whether to opt out of a public scheme into a private scheme, or whether to
supplement public pension contributions with private pension contributions. If they
do choose to participate in a private scheme, they are likely to have to choose how
their savings are to be invested. This paper looks at whether people are happy to opt
for private solutions, and particularly, how well disposed they are to saving for old
age in private, equity-based, funds. It suggests that the experience of poor stock
market performance, provider failure, counter-intuitive decisions by regulators and
the working of means-testing rules frighten people off voluntary participation in
private pension schemes. Whether justified or not, negative experiences can be
contagious. Evidence from the USA, Germany, Sweden and the UK is offered to
support this assertion.
1. INTRODUCTION
Most governments, both in the industrialised world and beyond, and many
commentators and analysts, argue that the only way of ensuring that people
have an adequate level of income in retirement is to get them to make more
provision for themselves whilst they are working. If the state can no longer
levy the taxes required to finance adequate pensions on a ‘pay-as-you-go’
basis, ‘funding’ is the appropriate response. In most cases, ‘funding’ is
synonymous with ‘private funding’, either via collective funds sponsored by
an employer or group of employers or, increasingly, via individual accounts.
Whether collective or individual, funding implies choice in ways that state
European Journal of Social Security, Volume 5 (2003), No. 4 305
* Senior Research Fellow, Department of Industrial Relations, London School of Economics.
Address: Houghton Street, Aldwych, London WC2A 2AE. E-mail: b.casey@lse.ac.uk Issues in
this paper have been discussed with a number of people who deserve thanks. These are Ros
Altmann, David Beers, Colin Brown, Delroy Conradi, Patrick Garvey, Mike Gautrey, Catriona
Lorimer, Mick McAteer, Ragnar Norberg, Karl-Gustav Scherman and David Webb. However,
none of them bear responsibility for views or errors.
306 Intersentia
systems do not. Participation in schemes is often voluntary; the level of
participation, and the form it takes, is also voluntary. However, making the
appropriate choices is widely considered to make substantial demands upon
individuals. Products are said to be too complex, whilst the information
supplied about them is said to be opaque. Over and above this, the level of
financial literacy is widely accepted to be too low to enable people to analyse
the requisite data, even if these data were presented more transparently.
Lastly, there is plenty of evidence that people are myopic, and have very high
discount rates, so that pension saving is given low priority. For all these
reasons, individuals, left to choose on their own, are likely to under-save or
to save inappropriately. This leads to proposals for choice to be curtailed,
and even the advocates of choice to suggest that ‘libertarian paternalism is
not an oxymoron’ (Sunstein and Thaler, 2003).
1
This paper is concerned not with whether people should have their choice
constrained by a benevolent state, nor with whether, and if so how, they can
be educated to make better choices. Rather, it is concerned with whether
people wish to participate in private pension schemes based upon funding.
In particular, it is concerned with whether people find this way of financing
retirement too risky for them to contemplate with equanimity. Accordingly,
it looks at the extent to which people are happy to choose funded pensions,
both those where they are required to be active managers of their savings
and those where their savings are managed by another and their role is
largely passive. In doing so, its principal interest is with the factors that
discourage people from choosing private, funded pensions, and with the
way changes in the environment in which private pensions operate impact
upon people’s willingness to embrace the funded approach. The ‘environ-
ment’ in question includes the economic environment, which is taken to
include the way in which investments are performing, the extent to which
companies and institutions in which savings might be invested and, more
specifically, the extent to which pension providers themselves are
considered as deserving of trust. It also includes the political environment,
especially the extent to which safeguards offered by governments to people
participating in private pension systems are seen as satisfying popular
expectations.
The ways in which changes in the environment make people less willing
either to favour private pensions at all, or, where these exist, to participate in
private pension schemes, are the subject of this paper. Adverse changes in
Bernard H. Casey
1
The argument here is that, whilst choice should be available, it should be constrained. In the
case of pension provision, people might be able to opt out of the public scheme, but the latter
should be the default. Equally, within a private scheme, less risky portfolios should be the
automatic recipients of contributions, unless the worker explicitly chooses an alternative.
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