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1. Why did EIOPA decide to produce this report?
“An important driver for the Report was the changing landscape of pension provision in Europe. Governments, employers and IORPs are increasingly shifting risks and the responsibility for individual financial planning towards members of pension schemes particularly via defined contribution (DC) schemes.
“What this also means is that non-professional scheme members need to increasingly cope with risks previously managed by professionals. But current methods of information provision, focused on protecting the provider rather than helping the individual, lag behind this trend. A new approach is needed, focused on the needs of an individual, which motivates, supports and facilitates effective decision-making. Behavioural economics provides useful insights into how this can be achieved.”
2. What does behavioural economics tell us about an average individual and the way he or she processes information?
“Behavioural economics tells us that people on average, are not as rational as we have expected them to be, or, to borrow the term – they are not homo economicus. Like the hero of our report, called Max, they have limited time and motivation to be involved in long term retirement planning, they do not like complexity, try to reduce it and often use rules of thumb to process information quickly. They are prone to bias when making decisions, they like benchmarks and comparisons and are often satisfied if decisions lead to sub-optimal results as long as they are reasonable. They prefer certainty, are unreasonably optimistic, put short-term interests first and have limited self-control to save for later.”
3. How should policy-makers change their approach towards communications with the members?
“First of all, policy-makers should think through the behavioural purposes of the information they are drafting: what should an individual be able to do with the information? What sort of financial decisions or choices should he make after reading the information?”
4. What is the added value of the new approach suggested in EIOPA report?
“Our report is a unique product because for the first time policy-makers have received advice at EU level, which shows how information can be structured and presented to help scheme members make appropriate financial decisions. We hope that this report will encourage those responsible for pension scheme communications to provide clear, member-friendly and comprehensible information that guides and supports European citizens in effective retirement planning.
“The approach to information provision that we suggest, will motivate people not to be passive, but to learn and understand more about their own pension schemes and their personal circumstances. It will help people make financial decisions and act on these decisions. In short, we believe that it will lead to an improved retirement savings culture in the future.”
What next?
EIOPA is currently working on further advice to the European Commission on the format and content of a benefit statement for occupational pension schemes and on principles for information disclosure to be included in the proposal for a new IORP Directive. We will certainly use the insights gained from this report in formulating our advice. And once the new Directive is in place, EIOPA should have the power to draft regulatory technical standards on information disclosure, in order to ensure effective and convergent approaches across the EU.