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DISCUSSION PAPER PI-0903

Financial Sophistication and Pension Plan Decisions

Alistair Byrne, David Blake and Graham Mannion

In this paper we use a private dataset to 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 funds is in designing pension plans and communication strategies that
reduce the chances of these less sophisticated plan members making mistakes. The results in
this paper highlight the areas where mistakes are made and the demographic profile of
members most in need of help.

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