Behavioural economics comes into it’s own when we see the effects of how a financial product is framed to the consumer. Why do you think life insurance is framed as life cover when it should be called death insurance or cover?
This is all the more pertinent when we come to the new pension rules. The psychology of positioning products to meet the new ‘freedom’ rules is going to have a huge effect on outcomes and potential detriment claims.
In their paper ‘Why don’t people insure later life consumption’ Brown j, Kling J et al question limited annuity demand in the face of longevity challenges. They found that consumers evaluate annuity products using a narrow ‘investment frame’ focusing on risk and return rather than a ‘consumption frame’ considering lifelong consumption issues.
This means when using a investment frame annuities are unattractive where low returns mean high risk. Indeed this can be reframed again when those with families are asked the same question they tend to choose the annuity due to loss aversion around succession planning.
Our recent market research into pension investors who are 55-65year old and on the ‘runway to retirement’ showcases the annuity framing effect in the following way. When they are asked what type of retirement product is attractive the majority desire a guaranteed income for life. Yet when positioned as an annuity, this appetite falls away…
There is also the fact that retirees now need to take more risk for equity style returns to provide long term care funding as and when needed. What is clear is the fact that if the FCA’s use of social science in nudging product providers to stop using teaser rates, free trails or lock in charges is a success then the framing of new pension products needs regulatory attention too.
Pension Wise, financial planners/advisers and product providers have an opportunity to frame pension planning as a consumption and a investment strategy. This will mean tactical use for annuities, drawdown and investment products to balance risk and return and manage loss aversion.
