Pensions are hard to understand, partly because levels of financial literacy are generally low, according to a series of ESRI studies. But they found that there are ways of improving understanding of the message.
Conducted as part of a research project for the Pensions Authority, they shed light on why it might be so difficult to persuade people to invest for retirement in the first place and then to put sufficient money into those pensions.
It also examined how spending in retirement differs from that of people still at work. The results of the research were announced at a conference on Wednesaday.
Researchers Anne Nolan and Karina Doorley looked at a group within the ongoing long-term Irish Longitudinal Study on Ageing (Tilda) which is being coordinated by Trinity college. It focused only on a subset of the Tilda cohort – 1,346 over-50s who had not yet retired, and it asked them a couple of question to get an understanding of how financially literate they were..
First they asked: If the chance of getting a disease is 10 percent, how many people out of 1,000 would be expected to get the disease?
They then asked how much would each winner get, if five people all had the winning numbers in the lottery and the prize was €2 million?
Only if they got at least one of those questions right were they asked a third question: Let’s say you have €200 in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?
Most people (almost 89 per cent) got the first answer correct, but over one in five failed to answer the second one.
For those who tackled the third question, fewer than one in five (17 per cent) got the answer. The biggest issue for most respondents was relying on simple rather than compound interest.
Gender and educational achievement played a part in how successfully people answered the questions, with women faring more poorly than men and those with third level education faring better than others.
Another ESRI team – Pete Lunn, Feidhlim McGowan and Deirdre Robertson – found that pension scheme members continue to struggle to fully understand annual pension benefit statements.
In a study, they found that using simple clear diagrams is these statement to explain figures did lead to people being more inclined to increase contributions.
Dr Lunn also found that there was a strong underestimation of how money grows over time, especially with regular savings. That makes it difficult to get people to appreciate the value of starting their pension saving early.
Turning to how those pension savings are spent in retirement, Paul Redmond and Seamus McGuinness, also ESRI researchers, examined spending patterns before and in retirement.
They found that while, on the surface, those in retirement were spending less, most of this could be explained by the discontinuation of work-related costs such as meals out of the home and higher spending on clothes and shoes.
"We know very little about how people make decisions on spending in reitrement," said Pensions Authority chief Brendan Kennedy, explaining the thinking behind the research.
