A new study has found that including explanatory diagrams in pension statements can significantly alter the decision-making of the plan holders.
However, the research, carried out by the ESRI’s Behavioural Research Unit, found diagrams did not clearly improve participants’ understanding of pension issues.
The findings could be useful for pension providers as they try to educate the 64% of working 25-34 year olds of the importance of starting a pension plan.
Researchers Pete Lunn and Féidhlim McGowan used a representative sample of 176 individuals aged 22-55.
They then designed and tested two diagrams.
The first illustrated how the total contribution to the pension was made up from take-home pay, tax relief and a matching contribution from the employer.
While the other one showed how contributing more money now increased the projected pension pot and hence higher income in retirement.
For each diagram, for half the sample the pension benefit statement contained the diagram while the other half saw the same information in a more traditional table.
As a result, the researchers could test specifically for the effect of using diagrams to convey the information.
The participants were given a hypothetical scenario in which a friend was showing them their statement and wanted advice.
After reading the statement the participants had to answer a series of multiple choice questions, to test whether they could remember the information.
If they got an answer correct, their chance of winning a €50 shopping voucher increased.
They were then asked to offer advice to their friend on how much to contribute to the pension and to provide a rationale.
While both diagrams had small impacts on the ability to recall key information or to understand the basic relationships underpinning a pension, the researchers found that the diagrams had an impact on decision making.
According to their findings, participants who saw the diagram showing the impact of higher contributions on projected pension income were significantly more likely to propose an increase in contributions than those who saw the same information in a table.
While those who saw either diagram were more likely to give the associated logic behind the diagram as the reason for their advice.
The authors say the results suggest the composition of pension contributions, especially the role of tax relief, appears to be too complex for the general population to understand.
As a result, they say, this is likely to undermine the effectiveness of these incentives.