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MiFID II Changes

Behavioural economics and flex benefits

May 15, 2018, 15:17 PM
by Dave Matthews, Aviva Flex lead

Appliance of science to flexible employee benefits

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Aviva Flex lead Dave Matthews explains how behavioural economics has the potential to make an impact on employee choices.

Flex benefits are voluntary, so nudges matter

The 6 April this year saw the 5% rise in auto-enrolled minimum pension contributions that will affect millions of people the length and breadth of the UK. Over the long term, we hope that this will be good news for employees as this compulsory measure helps them accumulate wealth and enjoy better retirements.

Without the compulsory nature of the arrangement, things would probably have carried on much as before, with patchy support and variable uptake. Compulsion works: making car insurance a legal requirement helps make our roads safer in the same way that seats belts save lives. When a product or service is voluntary – such as life, critical illness and income protection through flexible benefit schemes – sophisticated persuasion in the form of ‘nudges’ is required.

A crash-course in behavioural economics

The term comes from the work of US economist Richard H Thaler, who was awarded the Nobel Prize in Economic Sciences in October 2017 (1) for his work in this area. Professor Thaler devised concepts such as ‘mental accounting’, which describes how people treat money in different situations, applying specific categories of economic outcomes to their actions. The key takeout from all of this is that people perceive value in relative, rather than absolute terms and enjoy not only an object’s value, but also the quality of the deal.

It’s not what you ask, but how you ask it

‘Framing’ is another key behavioural economics concept in and covers cognitive bias in decision making. In simple terms, people arrive at different decisions depending on how the question is framed. Suppose you were given 50-50 odds of winning either £8 or £32. Turning it on its head, let’s suppose you were given a chance of losing either £8 or £32. Framed in terms of losses, people feel good when they lose £8 because they didn’t lose £32. Framed in terms of gains, when people won £8 they feel disappointed because they didn’t win £32.

A few more examples: would you buy meat labelled ‘80% lean’ or ‘20% fat’? If your doctor revealed that you had a ‘90% chance of survival’ following surgery, you’d probably choose it. However, if you were told the risk was a ‘10% chance of mortality’, you might have other thoughts.

From cashew nuts to the Nobel Prize

Even if you find economic theory a little stuffy, behavioural economics is something you can get excited about.

Here’s a short entertaining intro from Professor Thaler which will make you think differently about cashew nuts: And if you enjoy the detail, here's more

Essentially, the behavioural economics field provides a school of thought that people are irrational when it comes to money. This flows against the traditional economic model that humans are rational and forward thinking; where all decisions involve assessing costs and potential benefits. In the real world, people are present-based and irrational. This can lead them to make poor choices, if they get around to making choices at all. And for that, they need a nudge.

Don’t fudge the nudge

Not only are people affected by rational factors, such as a product’s pricing and key features, but also by the context in which the information is delivered to them. Nudges are small, low cost changes which can make a disproportionate difference to customer behaviour. Sometimes, tiny contextual changes to communications will affect employees when they are making important decisions.

For example, Aviva recently conducted tests on a major communications exercise, with letters to customers, using a control version and four test versions. The best-performing test version resulted in a huge uplift in response from the control version. Although the letters contained the same ‘core’ information, the title headings provided the most visible difference in each version. In terms of the document’s total word count, the nudges were minimal yet vitally important.

Communicating flex benefits

So how would we apply similar techniques to flex benefits? The communication could be a key point of contact, such as a letter, email or online journey.

If you are running an online campaign, tracking progress includes the number of site visits, conversion rate to the next page and drop-off rates.It’s essential to think about the key outcomes you wish to achieve. Can you measure and track them? It’s good to sketch out what you feel the endgame should be. For flex benefits you have a range of product options to play with, and a diverse workforce. Do you communicate with everyone or segment your target audience? Perhaps you only wish to target younger workers? It’s your call.

Above all, you need the time and resources to create different versions of communications so you can run a control version and different test options, to collate results to tell you what works best.

More nudges, better engagement

We’ve focused on the potential of deploying behavioural economics- influenced flex communications to employees. For flex benefits, the combination of data and technology means that there are excellent opportunities to better understand workforces and capture what works, for whom and when. The data insights can also help target specific employee profiles with relevant information, or send nudges throughout the year to increase engagement, creating a solid return on investment from the benefits spend.



GR05061 05/2018

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