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DISCUSSION PAPER PI-0903

Pension Plan Decisions

Alistair Byrne, David Blake and Graham Mannion

Abstract

We examine the contribution and investment decisions made by members
of a large UK based DC pension plan. We find that many employees appear
to be relatively financially sophisticated and follow approaches consistent
with economic and financial theory in terms of savings rates and investment
strategies. However, there are also many less sophisticated employees
who stick with plan default arrangements and/or follow simple rules of thumb
in saving and investing. The challenge for corporate sponsors of pension
plans is in designing arrangements and communication strategies that reduce
the chances of these less sophisticated plan members making mistakes – in the
sense of systematic deviations from optimal behaviour.

Keywords: Pensions; Defined Contribution; Contribution Rates;
Investment Choice; Behavioural Biases.