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Towards a Model of the Personal Retirement Savings Decision

Lester Wills and Donald Ross


With the ageing of the Baby Boom generation there has not only been
an increase in the number of people who survice retirement age, but
also the number of people who live for much longer. This has dramatically
increased the cost of providing pensions leading to doubts about viability
of current approaches. Increasingly, indivduals are being called upon to
provide for their own retirement income. Unfortunately, current approaches
to retirement savings are not conducive to that happening.

Where there is little involvement by individuals in retirement savings, the strength
of any connection between individuals and their retirement savings is questionable.
Ignorant of the details, individuals may consider that they are adequately covered
by the system and subsequently not be aware of the need to take a more active
approach to preparing for retirement. This lack of involvement may therefore be
hampering the provisioning of retirement savings.

Involvment in the personal retirement savings decision will be moderated by a
number of factors. The age and economic circumstances of individuals is likely
to have an impact upon their ability and/or willingness to save for retirement as
will the type of fund they belong to. In a Defined Benefit Fund there is a tenuous
link between individual contributions and account balances, unlike a Defined
Contribution (DC) Fund where there is a relatively clear relationship. As a result,
in a DC fund there is potential for individuals to identify with the amounts saved.
However this potential may not be realised in an environment where the individual
is not involved. Increased involvement in the personal retirement savings decision
has the potential to change individual attitudes towards retirement savings.

This paper proposes a model of the personal retirement savings decision based
upon the involvment of individuals in the decision to save for their retirement.
More particularly individual involvement is looked at in terms of:

Perceived ownership of personal retirement savings
Awareness of the need to save for retirement
Understanding of how to save for retirement.

The elements of involvement in the model are grounded in the concept of the
experimental learning cycle, namely that people learn from experience.
Experience is lacking where there is little or no involvement. If individuals
are not involved in the personal retirement savings decision they are not
likely to learn what is required to save for their retirement.

With a reduced workforce and increasing number of people in retirement
for living longer, it is essential that individuals are actively engaged in saving
for their retirement. This research will provide new insight into how this
could be done.