What elements of behavioural economics can employers build into a financial wellbeing strategy?

Behavioural economics, or the nudge theory, is one way that employers can encourage employees to make decisions which are in their best interests and help to influence action when it comes to financial wellbeing.

The science behind behavioural economics sees the study of psychology incorporated into the analysis of the decision-making behind an economic outcome. These factors can be used to help employers nudge employees in the right direction when they are signing up for financial benefits or taking advantage of financial education.

Therefore, employers should look at it from the perspective that they want employees to make rational decisions that can apply on a long-term basis, says Monica Kalia, founder at Neyber. “Sometimes our brains aren’t wired in that way and employees might take short cuts, therefore, if employers can incorporate aspects of behavioural economics into an employee’s wellbeing or financial wellbeing journey, It can be positive in terms of getting better outcomes from employees,” she explains.

Behavioural economics is a great method employers can employ to break down big issues, such as debt or how to save for the future, for example, to make these manageable for individuals,  adds Jeremy Beament, co-founder at Nudge Global. “How does an employee break them down into small achievable goals?” he explains. “An employer can help its employees do this and help improve their financial health.”

Nudging employees in the right direction
According to the Birmingham Hospital Saturday Fund’s (BHSF) A high wire with no safety net research, published July 2017, 72% of respondents worry, either all or some of the time, about their own financial security in the event of ill-health, with a further 48% of respondents losing sleep worrying about other financial issues.

If employees do not worry about their finances, they may be burying their head in the sand, so specific nudges and triggers might help them to reach their long-term goals says Kalia. “For the vast majority of people in this country, money or financial wellbeing is something they don’t like to think about; ‘because I don’t have time, because I’m too busy working’, which means it’s never really prioritised.

“It’s also not particularly interesting in terms of how financial wellbeing content is actually served to employees. [This] means you have a general lack of engagement [with] money so employers can use behavioural economics to effectively nudge employees into taking an interest in the first place. Making short-term decisions that map your long-term goals is a great example of how it can work well.”

The government’s Behavioural Insights Team (BIT), which is dedicated to the application of behavioural sciences, has set out four simple ways to approach behavioural economics, which make it easy to understand as well as implement. The four key points are to make it easy, attractive, timely and social (East); all of which can be translated into a financial wellbeing strategy.

Make it easy
Employers can make it easy for employees by giving them default options, such as opting out of benefits as opposed to opting in, making it easy for employees to take up a financial benefit, or accessing financial information, or cutting through the jargon and making financial communications clear and simple to understand.

Employers typically have the data at their fingertips that can help them feed the right financial information to an employee, says Beament. “Employers know when employees get a pay rise, when they move home, when they reach a landmark age and, as a consequence, are able to deliver information to employees in a timely manner and the employee is much more likely to be influenced, to take note and take action,” he explains.

Make it attractive and social
Making communications and financial benefits as attractive as possible by personalising information or making it visually stimulating can also help to influence an employee when it comes to financial wellbeing. For example, using case studies can encourage employees to adopt the same saving habits as others in their peer groups.

Communicating actively encourages employees to make choices. If they have discussions with colleagues, they may realise they are like-minded, which will help when making important financial decisions, says Kate Smith, head of pensions at Aegon. “We’re of a herd mentality but we think we’re not,” she says. “Aegon is looking at the future of social media, emailing employees asking if they have thought about this or that, or telling them that people like them have done this. It’s not about bombarding employees with messages but getting the right tailored message across, trying to land it at the right time for these individuals, it’s not a science it’s more of an art. Whatever [employers] do , [they] have to make it easy for employees to take action.”

Make it timely
Employers can help employees make financial decisions by offering immediate benefits or cost savings.

If employers make benefits readily available, then [they can] start the conversation about choice and at least an employee can make that choice, says Brian Hall, managing director at BHSF. “If an employer says ‘we’ll put X% of your salary into a savings plan if [an employee] puts in X%’, then [it] encourages savings habits,” he explains. “However, if employers offer employees cash, they will take that option. Employees will always take the cash [option] today rather than save for tomorrow, so employers need to think smart with the choices they make.”

Behavioural economics can help to encourage good saving habits, for example, through the save more tomorrow principle, which sees individuals commit to saving a portion of future pay rises or a bonus. “[Some employees may] have the minimal level of savings so [employers] need to get them to a higher level of savings, for example [saving into a] pension scheme,” says Aegon’s Smith. “A great example is if an employee signs up today but can’t afford to increase their contributions [straightaway], but can when they get a salary rise or five years along the line when they are more financially secure, they are signed up already for that future commitment. It’s quite a good way to influence employees to save more in the future.”

Tapping into employees’ logical and rational thinking style and actively engaging with them is a great way of using behavioural science, says Beament. “The number one organisation which is actively utilising behavioural science is Weight Watchers. What [it does] is reward behaviour. Humans are intrinsically designed to respond to reward behaviour so therefore what you can do is tap into the employees logical part of the brain, rather than the inertia part of the brain by prompting them to take action, and in this case, rewarding for taking positive action”

Auto-enrolment: The biggest behavioural economics case study?
One of the biggest behavioural economics studies to date in the UK is pensions auto-enrolment. Auto-enrolment makes it easy for employees to save into a pension because they physically have to opt out if they do not want to be part of a scheme, which involvess effort on their behalf. As of 1 February 2018, all eligible employees should have been enrolled into a pension scheme by their employer.

Auto-enrolment has been a good example of how to demonstrate that if employers can encourage employees to do something by opting them in, that effectively means the probability they will then go on to opt out is relatively low, says Kalia.

“It can actually be quite powerful,” she says. “I think the opt-out rate is 8-15% and [the Department of work and Pensions] DWP was thinking it would be closer to a third, which hasn’t materialised. It will be interesting to see if when the contributions [an employee has to make] increase, whether more people will opt out.”

In behavioural science terms, auto-enrolment is known as a system-one approach where behavioural change is relying on human tendency towards inertia rather than towards action, says Beament.

“It asks nothing of employees, however, we need to go beyond that to encourage employees into actively making choices,” he explains. “If you have a look at superannuation in Australia where we got the idea for auto-enrolment from in the first place, for over a decade it has been very successful and, over time, employees have begun making more active choices, selecting their own options rather than just saving directly into a default [pension] fund. Auto-enrolment has done its job just by getting employees in [to saving for their pension] but now we need to work hard to get employees to make more active decisions within that wrapper, and that will happen if evidence in Australia is anything to go by.”

Auto-enrolment has made it normal to start saving into a pension, even at an early age, adds Smith. “One of the things we have to learn from this is how auto-enrolment works, making it the norm to start saving. If an employer takes control it’s easier for the employee in this case to save, they do it because it’s basically harder to opt out than stay. It’s inertia that keeps them going and we need to learn from that.”

Using behavioural economics as part of a financial wellbeing strategy can certainly guide employees in the right direction, if auto-enrolment is anything to go by, however with a lack of understanding of what behavioural economics actually is, organisations may not be ready to integrate its theories into their strategy quite yet.