Employee Saving and Investment Decisions in Defined Contribution Pension Plans: Survey Evidence from the U.K

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This paper uses data from a survey of the members of a U.K. defined contribution pension plan to explore the attitudes and knowledge of employees faced with pension saving and investment decisions. The results are consistent with behavioral economics in that many employees show limited interest in their pension arrangements. Not all members have received advice about their pension, but those who have are more likely to have calculated their savings needs, to have higher levels of investment knowledge, and to actively review their investments than those who have not. The members' investment preferences appear broadly consistent with traditional finance theory, although the popularity of property may reflect familiarity bias. © 2007 Academy of Financial Services. All rights reserved.

JEL classification: D14; G11; G23

Keywords: Pensions; Defined contribution; Behavioral Economics; Survey data

1. Introduction

Most occupational pension plans operate on either a defined benefit ("DB") or a defined contribution ("DC") basis.1 In recent years there has been a significant shift in retirement income provision in the U.K. from the situation where employers typically offer DB plans, to a situation where DC plans are more common (e.g., NAPF, 2003). This follows a similar trend in the United States (e.g., Friedberg & Owyang, 2002).

Saving for retirement is a complex task and the stakes, ensuring an adequate income in retirement, are high. The move from DB to DC pensions puts much more responsibility into the hands of the individual participants, principally in terms of how much to save and how to invest the resulting funds. There is evidence that many people struggle to deal with this greater responsibility. For example, the U.S. Retirement Confidence Survey (EBRI, 2006) reports only 42% of respondents had tried to calculate how much money they should save for retirement, while 42% of the respondents in a survey of U.S. DC participants conducted by the John Hancock insurance company (John Hancock, 2003) said they had little or no investment knowledge. Volpe, Chen and Liu (2006), find that U.S. pension plan administrators think that their plan members lack knowledge on important personal financial issues, including investment and retirement planning.

This paper uses data from a survey of the members of a midsized U.K. DC pension plan to explore the attitudes and knowledge of individual employees faced with saving and investment choices in their pension plan. The data are used to assess the plan members' behavior against key theories from both traditional and behavioral economics and finance, and to assess the impact of advice on behavior. The results show that many plan members have little interest in or knowledge about their pension arrangements, including the investment decisions that they face. This is consistent with behavioral economics ideas such as default and status quo bias, and with previous U.S. survey evidence. Where members have received some form of advice about their pension, they are more likely to have calculated how much they need to save for their retirement, to report higher levels of investment knowledge and to be active in reviewing their investments. The members' investment preferences are broadly consistent with traditional finance theory. They do not report much interest in investing in own company stock, a poorly diversified strategy, but they do show a strong preference for investing in property, which may be an alternative manifestation of Huberman's (2001) familiarity bias.

The remainder of the paper is organized as follows. Section 2 reviews the previous literature on employee decision making in DC pension plans. Section 3 describes the objectives for the study and Section 4 discusses the data and method. Section 5 presents the results, with the discussion in Section 6, limitations and directions for future research in Section 7, and Section 8 concludes. …


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