Mid-life MOTs run danger of ‘shocking people into doing nothing’

James Phillips reports...

Employees will be like “rabbits in the headlights” if they are awakened to their low levels of saving too late in their working lives, it has been warned.

While aimed at improving individuals’ financial literacy, mid-life MOTs – originally suggested by John Cridland, and now adopted by several mainstream providers – run the risk of shocking people into inaction.

Although this is not an argument to necessarily abandon their use, Cass Business School professor of finance David Blake said this nudge tactic may have to be superseded by truly mandatory workplace savings plans.

Speaking at the Longevity 15 conference in Washington on 12 September, Blake, who is also director of the Pensions Institute, questioned whether the concept was a “good enough behavioural trigger for people to start doing something about it”.

He said: “The problem is, if you started when you were very young to save for your retirement, you can get a decent retirement on saving 10% to 14% of your salary, combined with your employer.

“If you do nothing until you’re in your mid-40s, the kind of money you’d have to save is going to be 30% to 40% of your salary. That’s going to be like rabbits in the headlights; people will be so shocked that the danger is they might not do anything at all.”

Auto-enrolment (AE) was launched in a bid to address this potential savings crisis – but there is a sizeable portion of the public who only entered a pension scheme for the first time midway through their career. The ineligibility of other workers, particularly the self-employed, deepens this problem.

“By all means, try to get these behavioural nudges to work – and I hope they are successful – but the question is, will they be successful enough? … Should you have mandatory contributions for savings? We’re going to have to confront that sooner or later.”

His comments came as other conference speakers warned of the “conundrum” faced by savers and governments in an ageing society, with improvements in life expectancy and falls in fertility rates reducing the ratio of working age people to old-age retirees.

Prudential Retirement senior vice-president and head of investment and pension solutions Yanela Frias said defined contribution savers and women, in particular, are forced to make at-retirement decisions with “imperfect and limited information”.