Pension Communication across Countries
In the Netherlands, Italy, and many other countries, recent reforms have made automatic mandatory pension saving less generous. The responsibility to guarantee an adequate standard of living has partly been shifted to individuals. Individuals have to make their own decisions on, for example, supplementary pension savings or on how to invest their DC pension assets.
Making pension related decisions in a way that is in the individuals’ own best interest is not an easy task. It requires forward looking behavior under uncertainty. Studies in many countries have shown that the large majority lacks pension awareness. Many individuals are not interested in pension decisions or lack the skills and information to make adequate decisions. There are several ways to assist individuals in making the right decisions. First, by structuring the actual choice set. Pension products should be as transparent as possible and inferior products or choice opportunities should not be offered. Second, by structuring the choice process. Context, timing, defaults, stepwise decisions, etc. are demonstrated to have large effects on the ultimate choice outcomes. Third, pension communication affects both involvement and the ability to make good decisions. The current proposal focuses on the latter. What are the experiences in other countries with pension communication, and what are the lessons that the Netherlands can learn from that? We focus on comparing Italy and the Netherlands but also consider several other countries such as Germany, Sweden and the United Kingdom.
Pension communication can have many different forms and involve different parties. In many countries with a public pension system, annual pension overviews are provided by the responsible government institution (such as the Social Security Administration in the US). See, for example, Kritzer and Smith (2016) for a comparison of the public pension statements in the US, Canada and Sweden. They also discuss how the effectiveness of the statements is evaluated. The effectiveness of the statements is judged in subjective terms of understanding the content of the statement. Whether the statements helps people to prepare better for retirement by making better pension related decisions is less clear.
In Italy, INPS launched the orange letter “La Mia Pensione” in 2015. With this letter, similar to the Swedish “Orange Envelope,” Italian workers are informed about the entity of their future pension, under different scenarios of GDP growth. The hope is that in Italy, where pension knowledge is still far from being rooted in the wealth management over the life cycle, this launch can have a huge positive impact on the economic behavior of people who become better informed about their income benefits after retirement. Following the life cycle model, people facing a pension lower than that expected before receiving the letter, would increase their private savings. In a project funded by INPS, Giacomo de Giorgi (NEW York Fed) plans to analyze whether this is indeed the case.
An example of pension communication linked to a reform rather than a periodic overview is the Italian communication campaign launched by the Italian government in order to stimulate the transfer of the severance pay that employees get when they retire into a pension fund (Gallo et al., 2016). This is inspired by the Italian pension reforms that have made first pillar pensions much less generous (Fornero and Monticone, 2011).
Atkinson et al. (2012) give an elaborate overview of pension communication campaigns in OECD countries related to pension reforms. They conclude that there is huge variety in the targets of the campaigns, the type of campaign, and the way in which the effectiveness of the campaign is evaluated. They also argue that the organizers of the campaigns and their evaluation hardly look at other countries and potentially could learn much more from each other.
Maloney and McCarthy (2016) sketch a theoretical framework for pension communication as a tool for pension decision-making based upon the theory of Kahneman (2011). Kahneman distinguishes two systems of decision-making: the intuitive system1 and the rational system 2. System 1 exhibits rules of thumb (heuristics) and leads to systematic biases and suboptimal decisions. The idea is that System 2 leads to better decisions than System 1, although this is only the case if System 2 works perfectly so that conscious decisions actually maximize expected utility. Effective pension communication can help to make people use system 2 instead of system 1. Complementarity with the structure of pension decisions is emphasized, however: if the choices are too complex and individuals feel it is not worth investing time and effort to understand the relevant issues, communication does not help. A similar conceptual framework, the Elaboration Likelihood Model, was already developed much earlier in marketing and economic psychology (Petty and Cacioppo, 1986). Prast and van Soest (2016) discuss the implications of this model for the relations between pension communication, financial literacy, choice architecture, pension awareness and the quality of pension decision making.
In this paper, we discuss the experience with pension communication in several countries. We distinguish between different types of pension communication. On the one hand, we consider general communication aimed at increasing pension literacy and awareness (e.g., explaining the general rules of the pension system or on the consequences of a pension reform). On the other hand, we consider more specific, personalized, information such as periodic statements on public, private, or total pension entitlements, or specific communication activities, e.g. targeted at specific groups like job changers or people who got married or divorced. We focus on Italy and the Netherlands but also discuss the UK, Germany, and Sweden. How is pension communication organized and how does this evolve over time? What are the differences and similarities across countries? What are the goals of different forms of pension communication? Are the campaigns evaluated and if so, how is their efficiency measured? In terms of the extent to which individuals feel informed, or also in terms of quality of pension decision-making? Are the communication campaigns effective, for the target group as a whole and for specific subgroups, such as younger/older age groups, men/women, high/low educated individuals, financially literate/illiterate individuals, singles/ couples, etc.? Is there a difference in effectiveness across the various types of pension communication?
– Overview of the existing literature on pension communication and the structure and quality of pension related decisions in OECD countries
– Consultation of experts on experiences with pension communication and its effectiveness in various countries, such as Marie Briere (AMUNDI and University Paris Dauphine), Elsa Fornero (Collegio Carlo Alberto, Turin) , Costanza Toricelli (University of Modena, Italy), Anna d’Addio (OECD, Paris, leading author of the OECD Pension at a Glance report), Michael Haliassos and Nathanael Vellekoop (Goethe University, Frankfurt), Edmund Cannon (University of Bristol), and Hazel Bateman (University of New South Wales, Sydney). Many of these experts are already part of our (Netspar) network; we have not asked them yet but we are convinced that they will be willing to collaborate.
– Analysis of micro-data in Italy and the Netherlands. Several survey data sets collected in the past few years contain useful information on pension awareness, knowledge of pension reforms, and pension related decisions. The micro-data will mainly inform us on differences across socio-economic groups in the Netherlands and Italy.