Employees unable to take more responsibility for their pensions

retirement age

Large numbers of public sector employees in the Netherlands lack the appropriate financial knowledge to manage the cuts to their pension accrual in an informed manner. For example, 19% of police officers and 18% of primary school teachers have insufficient financial knowledge. Better communication on how employees can respond to the overhaul of the pension system is therefore essential. Research shows that a good explanation of the benefits of taking some risk in pension investments leads to completely different preferences. Older employees are typically less inclined to take risks than their younger colleagues; however, after learning of the consequences of not doing so, they in fact want to take more risks than young people.

This is one of the conclusions of the report ‘Sustainable employability and retirement in the government and education sectors 2013’ (‘Duurzame inzetbaarheiden pensionering in de overheid en het onderwijs 2013’), published by Maastricht University’s Research Centre for Education and the Labour Market (ROA). The study was supported by the ABP pension fund and financed by the Ministry of Social Affairs and Employment and the GAK Institute.

Insufficient financial knowledge 

The Rutte–Asscher cabinet has decided to increase the retirement age to 66 in 2018 and 67 in 2021. Employees will therefore have to get used to working longer. In addition, cuts to pension accrual plans mean employees will have to take more personal responsibility to ensure they have enough to live on later. The ROA study shows what these changes to the pension system will require of employees and employers in various public sectors, such as the government and education sectors. However, it also reveals the lack of knowledge that will make this difficult for many employees. More than 19% of police force employees and 18% in primary education have insufficient financial knowledge. In other words, nearly one in five employees in these sectors needs extra training to be able to make informed decisions on what they should invest their pension in, and how much to invest.

retirement age by SilvebatPhoto by Silverbat via Flickr, some rights reserved

Risk preferences depend on explanation of pension accrual 

Few employees want to run risks with their pensions. They are wary both of investments made by their pension funds, and of investments in commercial pension products that fall under the third pillar of the Dutch pension system, such as annuities, life insurance, bank savings and investment products. In fact, almost one in ten employees prefers to take no risk whatsoever with their pension. What they often do not realise, however, is that investment strategies with limited risk on average yield lower returns. When this is explained to them, they change their risk preferences altogether. Most notably, older employees typically want to take much less risk with their pensions than younger people. On receiving a sound explanation, this pattern reverses: older employees in fact want to take even more risk than younger people.

ROA’s results reveal the urgent need for major changes to the communication and information provision surrounding pensions. It is essential for employees to gain better insight into the pension system: adequate financial knowledge is a necessary precondition to make sound decisions for supplementary pension products, and it turns out that a good explanation can lead to radically different preferences.

In the immediate future, communication on pensions will need to be better tailored to individual needs and directed towards promoting more realistic expectations among certain population groups. It will also have to highlight the need for employees to take more personal responsibility for their pensions, and raise awareness among employees that their choices will have a greater bearing on the age at which they can retire.

Source: Maastricht University, 24 January 2014

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