Benefits Canada with Lisa Kramer 10 August 2018
Cashiers will often ask Canadian consumers if they’d like to donate to a charity as they pay for items at retail stores. But what about applying the concept to retirement savings?
A pilot project in Mexico is taking voluntary contributions at the checkout counter to a whole new level by nudging people who are buying coffee or a bag of chips to contribute a few dollars to their retirement savings.
The effort is just one of several pilot projects launched in Mexico over the last few years by Ideas42, a U.S.-based non-profit organization that applies behavioural insights to find solutions to social problems. With funding from the MetLife Foundation, the Mexican project is a collaboration between Mexico’s pension regulator, the country’s 11 retirement savings administrators and Ideas42. The goal was to find a way to encourage higher voluntary contributions to retirement savings.
Mexico’s savings gap
Since 1997, Mexico’s pension system has called for 6.5 per cent of an employee’s salary to go into individual retirement accounts. For workers formally employed in registered, salaried jobs, the mandatory contribution includes an amount from employers (5.15 per cent), employees (1.125 per cent) and the government (0.225 per cent). At that contribution rate, employees are likely to retire on 40 per cent of their current salary, an amount considered insufficient for a successful retirement.
“Less than half of one per cent of people with active retirement accounts in Mexico make voluntary contributions,” says Andrew Fertig, a senior associate with Ideas42.
While low voluntary contributions in the formal employment sector are cause for concern, the situation is even more dire for the 60 per cent of Mexicans who are unemployed or working informally or independently. Fertig notes those in that group, even if they have a pension account through previous employment, are not only not making mandatory contributions to a pension plan but most likely aren’t saving at all for retirement.
To understand why people weren’t contributing voluntarily to their retirement savings, the Ideas42 team held in-depth interviews with 100 Mexican pension account holders in three major cities, spoke with pension system stakeholders and other experts, and analyzed the various outreach materials, processes and administrative data. With those insights, the organization designed testable behavioural interventions to tackle the barriers holding people back from saving for retirement.
Beginning in 2015, Ideas42 began launching a series of pilot projects to assess the impact on savings rates among certain groups. While the Mexican government had already moved to allow people to make voluntary contributions at retail outlets such as 7-Eleven, Ideas42 added some components to the concept through the pilot projects. Researchers targeted a representative sample of about 77,000 people from a single pension fund administrator and encouraged both active and inactive account holders to make voluntary contributions at the retail level.
“We sent out a direct mail communication about the retail branches and paired it with a micro-incentive — either a free cup of coffee at 7-Eleven or entrance into a lottery — when people went to 7-Eleven to make a contribution,” says Fertig.
How does it work at retail stores? To make a voluntary contribution, account holders provide their citizen identification number and the cashier provides a receipt of the transaction. The identification number serves to direct the funds to the national database and, from there, to the pension fund administrator.
Other Ideas42 projects included revising account statements sent through direct mail to provide clear information about the health of people’s retirement accounts and simple action steps for improving it, says Fertig. “To address a tendency to procrastinate or not consider retirement, we’re also using a face-aging software through the banks’ mobile apps that will show people an aged photo of themselves to make retirement feel more vivid.”
So far, seven pilot projects have wrapped up, with two more set to finish soon. “Each project differs in the behavioural barriers they address, as well as the delivery channel,” says Fertig.
Mexico’s pension landscape
Total pension assets in 2017:
Total pension assets in 2007:
10-year compound annual growth rate:
Ratio of pension assets to GDP:
Source: Willis Towers Watson, 2018 global pension assets study
“We’re acquiring a massive amount of data to analyze and synthesize, and we expect to have a report ready later this year. Our goal is to scale our successful interventions to as many Mexicans as possible. At the moment, we’ve already scaled the account statement concepts to 20 million people, so that’s already in place. We’re still working with our partners in Mexico to scale other successful pilot programs.”
Boosting the impact
Since Mexico is hardly the only country with low contribution levels to pension plans, Ideas42 believes the insights gained there could apply to other places as well.
“The problem of low pension plan contribution rates is pervasive, affecting populations of many countries around the world,” says Lisa Kramer, a professor of finance at the University of Toronto.
“Particularly in economies lacking a strong social safety net, the failure of individuals to save early and save often can lead to dire circumstances later in life. Many people are unable to retire and instead continue working through their golden years. The use of behavioural science to counter the effects is important and very promising.”
While the retail option facilitates retirement savings in Mexico and makes the idea of saving more salient by getting people to think about it more often, Kramer notes the merits of combining such efforts with other behavioural approaches. “Additional behavioural interventions are proven to work and are worth considering as well,” she says.
She points to approaches that have shown promise in Canada, such as making participation the default option. “In some cases, people have to actively register to participate in employer-sponsored pension plans, and the result is that some folks fail to register at all, even after years of employment,” she says.
“By switching from an opt-in approach to opt out, people will still have the flexibility to withdraw their participation. But the evidence suggests most people will be glad to be automatically enrolled and will continue to stay enrolled.”
As for the lessons Ideas42 has taken from its pilot projects so far, it has found that increased access to savings vehicles through retail channels alone wasn’t enough to boost contribution rates. “Most important is that increasing access does not translate to behaviour change — in this case, contributions. Nor does access make the idea of pension contributions more top of mind,” says Fertig, who notes the importance of the communications component in boosting the impact.
“Pairing increased access with a strong, frequent and highly visible communications campaign utilizing multiple channels is what can help lead to meaningful change in pension contribution rates,” he says.
Ideas42 is now planning a report later this year based on the findings and data accumulated so far. It’s also planning to continue with test projects. “Before we can roll anything out nationwide, we want to refine our designs and test them for effectiveness,” says Fertig.
The organization is hoping its research will help Mexicans put away more for retirement by designing solutions to encourage regular voluntary savings and eliminate the gap between account holders’ intention to save and actually doing so. “We are trying to match and combine tried-and-true methods and see if it has an impact,” says Fertig.
“To really make a difference will require a sustained effort and a broad access channel.”