title: An exploration of the effect of pension communications on employee pension understanding using a multiple case studies approach and a bounded rationality framework
Creators: name: Maloney, Maureen
Publisher: name: University of Galway
Year: 2024
Subjects: subject: Pension
subject: Defined Contribution
subject: Communication
subject: Complexity
subject: case study
subject: Bounded Rationality
subject: Cognitive Load Theory
subject: Business and Economics
subject: Management

description: Title: An Exploration of the Effect of Pension Communications on Employee Pension Understanding Using a Multiple Case Studies Approach and a Bounded Rationality Framework Research question and objectives: Using a bounded rationality framework, how do variations in pension communication policies at organisational level assist employee understanding of their DC (defined contribution) occupational pension plan? The objectives of this research are to: • Evaluate the differences between organisational pension plans; • Analyse organisational differences in developing, analysing and reviewing pension communications policies; • Evaluate pension communications used within the organisation in relation to frequency, timing, individualisation, segmentation, targeting and simplicity; and • Explore the interaction between pension communication and employee pension understanding. This research question and the objectives were explored in four companies operating in Ireland using a multiple case study methodology. Topic importance: Defined contribution (DC) occupational pension plans, currently a voluntary benefit offered by many employers in Ireland, are the main source of non-State retirement savings. Employees bear the risk for these complicated pension plans and are expected to make decisions about the amount to save, the choice of investment funds and the potential value of State benefits at retirement. These decisions are onerous for non-professional investors. Employee understanding of their pension options is especially important if they are to bridge the gap between pension poverty and pension adequacy. Looking at the connection between organisation communication and employee understanding was the original subject of this thesis. Key gaps: There is little academic pension research conducted in workplace settings where pension information is given to employees and pension decisions are made. Academic reward management research examined to date does not consider the engagement of the employer in formulating and implementing pension policies. Most bounded rationality pension research focuses on pension structure, rather than communications and pension coverage/adequacy while ignoring employee understanding. Pension research, examined to date, uses bounded rationality concepts to explain unexpected results, generally after a change in pension structure. Key contributions: This research contributes to empirical pension research by using the case study method to examine employee understanding within the workplace context where employees learn about pensions. It adds to bounded rationality theory by providing a model that visualises the relationship between organisation pension policies, their framing effects and individual cognitive processes. This research contributes to the multiple case study research method by identifying transparent criteria applied across case study organisations providing a foundation for meaningful comparisons. It contributes to pension theory development by incorporating Cognitive Load Theory, a branch of bounded rationality theory. Intrinsic and extraneous cognitive load provide the vocabulary and theoretical construct to analyse, operationalise and measure pension plan complexity. This research adds to the policy debate by suggesting that DC plans are so complex that only the most diligent employee is likely to understand enough about pensions to make reasoned decisions. Theoretical lens: The model developed for this research was based on the concept of bounded rationality, identified by Herbert Simon (2008, p. 893) “… to designate rational choice that takes into account the cognitive limitations of the decision-maker—limitations of both knowledge and computational capacity.” This was supplemented by the work of behavioural psychologists Tversky and Kahneman (1981) who operationalised the cognitive process and identified heuristics and biases that often hinder rational decisions. This work informed the development of a model that suggested certain communication practices could improve the cognitive process. When preliminary findings indicated that even these practices did not give clear evidence of promoting employee understanding, the theoretical lens was broadened to include Cognitive Load Theory (CLT), a branch of bounded rationality theory developed by educational researchers. Simplicity was added as both a communication and a structural policy that could positively impact human cognition. Research findings and recommendations: This research confirmed the findings of other research: if a pension plan is voluntary, a significant percentage of employees will not join, losing the employer match and tax relief. Further, several employee interviewees were unaware of the amount of the employer match or the impact of tax relief on take-home pay. The poor understanding of the employees working in organisations with relatively well thought out pension communications suggested that other factors were interfering with the cognitive process. Pension complexity is often acknowledged. However, this research operationalised a method of measuring pension complexity using criteria to measure both intrinsic (based on pension plan content) and extraneous cognitive load (based on communication presentation) in pension documents. Evidence of high intrinsic and extraneous cognitive load suggests that DC plans, as they are currently structured and communicated, are beyond the cognitive capacity of pension plan members. This controversial finding requires further evidence to confirm or deny its veracity and to explore the limitations of human cognition when faced with a DC pension plan. At the very least, a simple structure and simple communication should be the goal of the State, regulators and employers. This research adds to the mounting research suggesting that defaults change behaviour but reduce employee engagement and understanding. Because employees are held responsible for their pension ‘choices’, the ethics of defaults need further explanation. No companies participating in this research had a pension communication strategy. This led to conflicting objectives within the organisation and with third parties, diminishing the effectiveness of this expensive benefit. A recommendation to employers is to develop a pension communication strategy that is shared with employees and stakeholders. This is necessary if a pension is to be used as a retention tool in a competitive labour market.