Written by Laura Haynes 18th October 2018

This is the first of a series of articles written for Parmenion by Dr. Laura Hayes.

Dr Laura Haynes is a behavioural scientist with a passion for designing services around real-world behaviour. She brings a unique combination of skills to this challenge - a deep understanding of how to influence behaviour, analytical rigour, and pragmatic and commercial savvy.

Laura is the Founder Director of Behaviour Change People (from 2016), a boutique behavioural science consultancy specialising in robust solutions to drive customer outcomes.

Laura has a doctorate in Experimental Psychology from the University of Cambridge, and has held numerous advisory positions in academia, government and industry in the UK, US and Australia.

We invited Dr Laura Haynes, a behavioural scientist (formerly of the Nudge Unit in No. 10 Downing Street) who works with us on new product design, to offer a psychological perspective on the DB transfer decision.

Some clients push hard for “their pension cash” while they can, even when this may not be in their long-term interests. Others shy away from the decision. What can behavioural economics and cognitive psychology tell us about the “irrational biases” clients may experience when considering a DB transfer offer? In a series of three articles, Dr Haynes explores the biases at play, and how Advisers can support their clients to reach the best decision for their circumstances.

The focus of this first article is present bias – the tendency to value immediately available rewards more than delayed ones, and what science can tell us about how to reduce its often irrational, impulsive effect on our decisions.

Behavioural biases

Human brains have evolved to help us navigate the world around us using a finite amount of resources (our head size is restricted, and there are limits on glucose metabolism for energy). Mostly they do a great job. Partly because we’ve developed mental shortcuts which enable us to reserve cognitive resources for the most important decisions. Over the last 50 years, psychologists and economists have catalogued an array of these mental shortcuts, often referred to as “behavioural biases”. Many of these “biases” have started to enter the wider financial services parlance. You may already be familiar with “loss aversion”, “framing effects” and the “sunk cost effect”. These phenomena are termed “biases” as although they often serve us well, they can also lead to irrational decisions...

Present bias: Its role in retirement choices

From an evolutionary perspective, it makes sense to value immediately available rewards more highly than ones only available in the future – “a bird in the hand is worth two in the bush” when out hunter-gathering. However, this cognitive phenomenon, known as “present bias”, can also drive impulsive, irrational decisions. Particularly if we overvalue immediate rewards at the expense of our long term interests. Present bias is a major reason why people make suboptimal retirement choices – spending for pleasure now, not saving to secure our futures. When it comes to DB transfers, present bias can cause clients to irrationally favour accessing “their pension cash” immediately, even if this option leaves them worse off in the long run.

we overvalue immediate rewards at the expense of our long term interests.

For some clients, you’ll ascertain that taking up the CETV on offer is the right option – perhaps due to poor health. However, other clients, with good reason to preserve their secure benefits, remain keen to “take the money now”. By drawing on behavioural research on how to tackle the present bias, you can help your clients avoid falling victim to it.

1. Framing the decision: “Should you speed up access to your DC pension?”

Presented with the option of a DB transfer, clients are likely to anchor on the immediately available opportunity. They are effectively framing their decision as “why should I consider delaying immediate gratification?” Psychological research shows this approach increases peoples’ present bias, making the immediate option even more attractive. You can help these clients by reframing the choice: encourage them to anchor instead on their DC pension assets, and consider the pros and cons of expediting access to those. Drawing on your financial analysis to articulate, what clients will forgo, it can be possible to mitigate the impact of present bias.

2. Encourage empathy in your clients for their future, older selves

There’s growing evidence that we are more generous to people we empathise with. Therefore, increasing empathy for our own “future selves” prompts us to provide more for our own financial future wellbeing. Studies show that when presented with an aged avatar of themselves, people make greater contributions toward their retirement. By inspiring your clients to imagine their future selves, someone perhaps appreciative of the certainty which DB pensions can provide, and grateful for not having to manage the decisions involved in drawdown investments into their twilight years, or made aware of the potential for extreme longevity, you can help tackle their “present bias” urge.

3. Prompt clients to imagine in detail how they might spend in future

Research demonstrates that people tend to be less “present biased” when encouraged to think about future options using concrete imagery, rather than abstract terms or numbers. If your client has indicated they might like to have enough income to go on regular holidays, or to be able to have a certain lifestyle (lunches out, social activities for example), prompt them to imagine this in detail – where this might be, and what they might do or buy. Ideally focus on those activities or events which arouse positive emotions, which tend to elicit more patience than negative ones.

By integrating the above three suggestions, you can enable a discussion with clients that is anchored on their future self: how do they imagine they will spend money, what else might they appreciate as they get older, what will they be required to forgo in order to expedite access to it? These, are no doubt, aspects of many retirement discussions you already have with clients, but by systematically structuring the conversation using these insights, you can help your DB transfer clients cultivate prudence in the face of temptation.

See parts 2 and 3 of this series

The above article is intended to be a topical commentary and should not be construed as financial advice from either the author or Parmenion Capital Partners LLP. If a client wishes to obtain financial advice as to whether an investment is suitable for their needs, they should consult an authorised Financial Adviser. Past performance is not an indicator of future returns.”

Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact your financial adviser.