Communicating In Scenarios: Towards Improving Participant Decisions Regarding Retirement

At the end of their working life, participants of a pension fund make a decision regarding their retirement based on the accrued pension wealth: the pension decumulation choice. In recent years, Dutch societal developments such as an individualising society and increasing heterogeneity in households will lead to more freedom of choice and responsibility shifting towards individuals regarding this decision. However, this pay-out phase decision proves to be complex as it is subject to financial uncertainty over a long time horizon. It requires a sufficient level of financial literacy, while behavioural economics indicate that individuals act differently than the completely rational and analytical ‘homo economicus’. Hence, not all participants may be able to make a well substantiated and financially adequate pension decumulation choice. To better inform and assist in decision-making, Soetendal et al. (2019) prescribe that the pension sector should take a revised attitude in understanding participant needs and preferences. This entails putting the interest of the participant first in the form of an ‘ambition of care’. A new communication method with the purpose of better informing participants is the ‘Uniforme Rekenmethodiek’, which presents the dispersion in pension outcome in three scenarios. Insight in pension outcome uncertainty may enable a better assessment of retirement income adequacy. Given the new communication method, the complexity of the pension decumulation choice and an ambition of care, we identified a potential next step in improving retirement decisions. Therefore, we constructed the following research question:

“To what extent does a decision environment with three scenarios communicating uncertainty, based on participants’ needs and preferences, alter the pension decumulation choice (PDC) made and what are potential improvement directions?”

To answer the research question, we conducted a survey to study the impact of communicating uncertainty on PDC decision-making. Participants indicated their PDC preference based on three types of information provision; with each type we gradually presented more information regarding the dispersion of PDC outcomes. We also let participants substantiate and evaluate their PDCs made. Additionally, we obtained insight in background characteristics to put decision-making in perspective. Here, we particularly focused on the risk preference and the time preference of money. The questionnaire was sent to 22,000 participants between the age of 60-66, enrolled in a DB scheme of a large Dutch pension fund. In total, 3,419 participants completed the questionnaire.

Our study finds that PDC decision-making is significantly influenced by communicating uncertainty in scenarios, especially when the dispersion in outcomes is presented over a longer horizon than solely on the statutory pension age. Moreover, PDCs and their substantiations imply that a longer time horizon provides better insight into the consequences of PDC options. This is also implied by participants evaluating their own PDC consideration; a quarter of the participants evaluated their decisions as better considered from the communication of scenarios beyond the statutory pension age. Here, of the ten percent that changed their PDC preference, half indicated they made a better considered decision. Yet, from incompletion percentages and reactions to our study we learned that communicating scenarios is perceived as complex by participants. We find that participants’ level of education and pension literacy influence the extent of this perceived complexity. Besides, given the significant correlation between the level of education and accrued pension wealth, we conclude that scenario communication is more relevant for participants with more accrued pension wealth.

With significant influence on decision-making and a large percentage of the participants evaluating their decisions as better considered, we recommend that the pension sector should further study the communication of PDC options in scenarios beyond the statutory pension age. This study provides several indications that insight in the dispersion of outcomes can assist in making a more substantiated and financially adequate retirement decision. Yet, our recommendation requires some nuance. The trade-off between information provision and complexity arises, as not all participants may be able to correctly process scenario information. Therefore, we suggest to further improve the method for communicating in scenarios and the corresponding choice architecture as part of future research.