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Creating a savings habit

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Francis Goss looks at how we develop habitual behaviours and discusses how the industry can learn from this and help create a savings culture.

Every year at around this time, millions of people make the annual pilgrimage to their loft to retrieve their Christmas decorations. Some put them up on the 1st December while others wait until Christmas Eve (which I have never understood). In our house, the tree goes up a couple of weeks before Christmas and the various decorations all have their place.  Traditions can be referred to as ‘nostalgic habits’ - repeated behaviours that we will always do, circumstances permitting.

Savings habits are a critical element of preparing for retirement. Whilst the pensions industry is always changing, with new legislation, new products such as CDCs and new investment approaches, the need for individuals to develop the habit of saving and reviewing their retirement savings never changes. It may seem obvious, but in this ever-changing world, the habit of saving for retirement needs to be developed from as young an age as possible.  

So how do we encourage people to develop a habit of saving? How do we create a tradition of saving in the UK, such that failure to save for retirement is seen as the exception rather than the norm?

Philippa Lally a psychology researcher at University College London, sought to establish how long it takes to form a habit. Lally published her findings in the European Journal of Social Psychology. The study examined the habits of 96 people over a 12-week period. Some people chose simple habits like “drinking a bottle of water with lunch.” Others chose more difficult tasks like “running for 15 minutes before dinner.” At the end of the 12 weeks, the researchers analysed the data to determine how long it took each person to go from starting a new behaviour to automatically doing it. On average, it took 66 days before a new behaviour becomes automatic.

Auto enrolment has played a vital role in creating savings habits, but auto enrolment alone does not lead to increased engagement. In fact, many auto-enrolled members are disengaged and have never reviewed their balance or set a retirement income target.

To help members to develop long term savings habits, we can learn from wearable fitness devices, savings apps and the gaming industry, all of which aim to create habits. By harnessing the power of social accountability, gamification, reward loops, nudge communications, personalisation and artificial intelligence, solutions can be developed that help members to develop positive habits that have a long-term difference to their retirement outcomes.

Developing savings habits may well be more challenging in this VUCA (volatile, uncertain, complex and ambiguous) world, but the good news is that once habits are formed, they become hard to break. This is evidenced by the encouragingly low volume of employees that have opted out of auto enrolment, and of course by the millions of people who will put up the same decorations in the same place on the same weekend that they have done for the last twenty years this Christmas. Old habits Die Hard (there’s a great Christmas film to watch again!). 

Francis Goss, Chief Commercial Officer, AHC.