The cost of choice: should we be free to choose when it comes to our pension?

This thesis asks to what extent should we be free to choose when it comes to our pension? Three perspectives were considered: that of the state; that of the employer; and that of the individual. The thesis starts by examining the issue from an institutional perspective. Using the example of three different countries’ pension policies, it argues that there is a trade-off between maintaining private incentives to save and cost. If pension saving is compulsory, then the state is free to target money at those most in need (which is more cost effective). If pension saving is voluntary, then the state needs to invest heavily in creating a structure that rewards private saving (through tax incentives and the reduction of means testing). The second part of the thesis is a qualitative study that looks at choice from the perspective of the employer. The UK government has restricted its role to poverty relief and occupational pension saving is expected to bridge the gap between needs and aspiration in retirement. However, employers are allowed considerable discretion over how much they contribute to their employees’ pensions. Fifteen private sector employers were interviewed to uncover the logic behind the design of their pension offer. It found that few profit-seeking employers saw any commercial advantage to paying in the form of a pension. Finally, the thesis looks at choice from the point of view of the individual. Using three experimental studies it asks, if given choice, do individuals go on to make ‘good’ choices. The first experiment recasts the issue of whether people are saving ‘enough’ for their retirement by looking at the job choice itself. The following two experiments look at the impact that financial communication has on pension engagement. In conclusion this thesis argues: (i) it is expensive to design a system that will incentivise voluntary saving; (ii) profit seeking employers see little commercial advantage to paying in the form of a pension; and (iii) many individuals fail to respond to the incentives to save because of almost insurmountable information problems. The current UK pension system is founded on an ideological commitment to free choice, and this carries an unduly heavy cost, not only for the individual, but also for the state.