Improving participation and engagement in pension savings is a constant challenge for the retirement industry, but experts point to more insistent and consistent tactics around member behaviour.

Derek Messacar, associate professor of applied economics, Memorial University

Programs that offer tax deductions on savings in designated accounts have, for a long time now, been contested as an ineffective way to generate new wealth.

Since people weren’t responding meaningfully to these incentives, a different approach was needed. Behavioural economics offers a way to think about why tax incentives don’t always work: people often struggle to understand how much they need to save to live comfortably in retirement and may lack self-control to make the right decisions. In 2017, Richard Thaler won the Nobel Prize in Economic Sciences at a time when nudges were regarded as a magic bullet for this savings problem.

Read: How Poland’s new DC program was designed using behavioural science

Some studies on the longer-term effects of savings nudges paint a different picture. For example, one report from the U.S. — by researchers who have long been advocates of nudges — found they raise net retirement savings by less than one per cent of income over five years, in part because high employee turnover prevents the vesting of employer contributions.

Nudges haven’t had the large aggregate effects on savings we once expected. That’s not necessarily a problem, but it requires us to rethink our objectives. In an analysis of an automatic escalation feature of registered pension plans, I show nudging is a simple way to help people save who are the most at risk of under-preparing for retirement on their own.

Active savers — who respond to a nudge by decreasing how much they contribute to other accounts — tend to have higher levels of education and financial literacy and save adequately on their own. But passive savers — for whom a nudge raises total wealth accumulation — tend to have lower levels of private savings and benefit a lot from the extra help.

Read: Head to head: Are employers’ financial literacy initiatives translating into reality?

The median retirement income replacement rate is about 80 per cent and this is improving over time. Taken together, renewed emphasis on “shoving” isn’t needed, but nudges remain an effective strategy for helping some people with their retirement goals.

Preet Banerjee, personal finance expert

If we want better retirement outcomes, we should lean harder on proven choice architecture.

Not everywhere. Not forever. But where the evidence is overwhelming, a gentle nudge should graduate to a firm shove (paired with an easy opt out and clear disclosure).

Start with participation. After auto-enrolment was rolled out in the U.K., private sector pension participation rose from roughly 42 per cent in 2011 to 86 per cent by 2022. That’s a population-level improvement that education alone never achieved. Keep choice. Keep transparency. Make “in, unless you opt out” the default.

Read: What can Canada learn from Britain’s pension reforms?

Next, savings adequacy. People intend to save more later and life gets in the way. One of the most famous research papers in the field showed committing today to future, pay-linked increases raises contribution rates materially. It found average savings rates rose from 3.5 per cent to 13.6 per cent over 40 months. Default members into auto-escalation with an easy off-ramp and regular reminders.

Defaults also need teeth. We’ve known for decades that defaults drive behaviour. Auto-enrolment boosts participation and default contribution rates and investment selections both influence outcomes. That places a duty on plan sponsors to set evidence-based defaults and to re-enrol members who drift into poor choices. Design them well, review them often and publish the rationale. Complement this with financial literacy initiatives.

Finally, it has been academically documented that participation rates are correlated with mental health. Lower participation today has an impact on lifetime financial well-being. Auto-enrolment can reduce this participation gap. When a shove reduces disparities and increases financial resilience, that’s a public interest win.

The choice is clear. Use shoves where the gains are large, the evidence is strong and autonomy is preserved through easy, well signposted opt outs. Do this and more Canadians will retire with higher coverage, higher contributions and less regret.

Read: 2022 DCIF: Using behavioural finance concepts to improve DC plan participation, contribution rates