‘Poverty isn’t a lack of character; it’s a lack of cash’.
This was the focal point of a fantastic TED talk I watched this week by Dutch historian Rutger Bregman.
Bregman referenced a study by American psychologists who had focussed on sugar cane farmers in India.¹ These farmers receive roughly 60% of their annual income in one go, as the harvest is completed. This leaves them with a significant chunk of money for one half of the year, and sees them struggling during the remainder.
The research team tested the farmers’ IQ both before and after the harvest, and discovered their fluctuating wealth had a significant impact, with farmers losing 14 IQ points during the months that they were struggling to make ends meet.
Now, by no means are those living in poverty less intelligent than those living the high life. However, I’m sure the concept of struggling to think clearly in times of financial anxiety is something we can all relate to.
Whether you constantly struggle to make ends meet or have a tough month every now and then, the ‘symptoms’ of being strapped for cash can make life miserable. You may have sleepless nights, struggle with anxiety or feel isolated when you can’t afford to go out and socialise. This can not only be a huge burden, it can also change the way you think.
Eldar Shafir at Princeton describes this change in mind set as ‘scarcity mentality’.² Knowing that money is in short supply has the effect of narrowing our focus, and leads us to think one day ahead instead of one year. Surely, this makes sense. When you’re painstakingly balancing budgets to ensure you have enough food until pay day, the last thing on your mind is the income you are going to need in retirement in thirty years’ time.
Why people opt out
When we take all of this into account, it becomes blindingly obvious why people choose to opt out of their company pension scheme. Employees may understand that paying pension contributions will benefit them in later life but, if they are caught up in this ‘scarcity mentality’, what is going to take priority? Sixty pounds into a pension they will receive in thirty years’ time, or sixty pounds they can use to feed their family this week?
No matter what sector each of us works in, we all have colleagues at the top of the ladder whose times of financial turmoil are likely to be a distant memory. HR Heads at most companies will no doubt have regular dialogues with executives trying to ensure that they get the maximum value from their company pension. There is absolutely nothing wrong with this. These people work hard; kudos.
However, it’s easy to forget about the wider work force. The sea of employees that work hard every day and may not be contacting HR regularly about their pension because they simply have not given it a moment’s thought; staff who are experiencing that narrowing field of vision which comes with financial instability.
The value of communications
This is where the communications and financial educational material employers provide really come into play. Instead of waiting for ‘ordinary’ employees to engage with their pension, companies have the ability to get on the front foot, and engage their staff with long term saving from day one.
Our recent communications survey highlighted just how valuable this could be. Out of the respondents earning less than £11,850 per year, 68% stated they would like their employer to take a proactive approach when it comes to pension education.³ Those in this income bracket also stated this educational material would be most helpful when the focus was placed on value for money.
We can take a few positive messages from this. Firstly, there is a definite desire from those on lower salaries to learn about retirement savings. Although the scarcity mentality may be more prevalent in this income bracket, it certainly does not seem to have affected people’s drive to learn more about the options available to them. Employers should also be comforted knowing there is an appetite for the educational material they create.
Value for money
The call for this material to be focused on value for money is simple, but could be hugely effective if utilised in the right way. When someone struggling to make ends meet sees sixty pounds taken out of their pay for their pension, they are highly likely to consider opting out - particularly if the value a pension can provide hasn’t been properly communicated.
What if, however, this person’s employer made it clear from day one that the sixty pounds that had been taken was not just sixty pounds? What if they had taken the time to explain that the company would also pay sixty pounds on this person’s behalf?
What if they had explained the effects of tax relief and investment growth? Would this person then start to see the true value of this sixty pounds, and know that with their employer’s help they could effectively doubling the amount saved each month? It definitely would not hurt.
Employers have an incredible opportunity to harness their internal communications material and radically change the course of their staff’s lives in their golden years. The sheer multitude of recent automatic enrolment legislation and legal requirements can be overwhelming for employers, and can impact the amount of time and money they can spend being paternalistic with their benefits offering. However, if you engage with your staff early enough, you might just break through that dreaded scarcity mentality; because of your tailored educational material they might widen their financial horizons and be able to achieve a lifestyle in retirement that they had not thought possible. Don’t let them get left behind.
³ PS Aspire report: Pension communication strategies for an evolving workforce (July 2018, 2035 respondents).
Topics: Friday Fun