DISCUSSION PAPER PI-0404
Why People Don't Choose Private Pensions: The Impact of 'Contagion'
Bernard H Casey
Pension privatisation requires that people exercise choice. They might have
to choose whether to opt out of a public scheme into a private scheme, or
whether to supplement public pension contributions with private pension
contributions. If they do choose to participate in a private scheme, they are
likely to have to choose how their savings are to be invested. This paper looks
at whether people are happy to opt for private solutions, and particularly, how
well disposed they are to saving for old age in private, equity-based, funds. It
suggests that the experience of poor stock market performance, provider failure,
counter-intuitive decisions by regulators and the working of means-testing rules
frighten people off voluntary participation in private pension schemes. Whether
justified or not, negative experiences can be contagious. Evidence from the USA,
Germany, Sweden and the UK is offered to support this assertion.