An Evaluation on the Reasons for the Household Leaving the Private Pension System Within the Framework of Overconfidence Bias

In this article, in the light of the findings of the Household Financial Perception and Attitudes Survey, and with reference to the concept of "overconfidence bias" in behavioural economics/finance, the Private Pension System (PPS) and Auto Enrolment System (AES) ownership of the Turkish household, and the reasons for the household to leave these systems are evaluated.

The National Household Financial Perception and Attitude Survey covers 89% of the total households and 92% of the GDP.

"The National Household Financial Perception and Attitude Survey" was conducted by Barem Pazar Araştırma ve Danışmanlık AR-GE Merkezi (Barem Market Research and Consultancy R&D Centre) for Finance Office under the Presidency of Turkey. The survey was carried out in 49 cities and with 15,041 interviewees who decide on investment matters or take a role in the decision process, with a view to determining their perceptions about the current financial system, investment preferences and driving factors of these, their tendency to save outside the financial system, perceptions, and expectations for new financial products. The research was made public in December 2020 with the participation of the president of the Finance Office under the Presidency of Turkey, Prof. Dr. Göksel Aşan. The research in question emerges as a highly fundamental resource that needs to be emphasised for its representation capability as it covers 89% of the total households and 92% of GDP. It is expected that the findings of the research will provide input for the future strategies and decisions of policy-makers.

According to the aforementioned research, it is demonstrated that the interviewees emphasise long-term thinking, long-term decisions about money, and good bargaining while defining their individual characteristics; on the other hand, it is seen that the tendency to take risks and live for the day is expressed as the least owned traits. In addition to this, it is seen that almost half of the participants make savings plans based on the maturity of more than one year.

The Understanding That "I Can Manage My Own Money Best" Ranks First Among the Reasons for Leaving the Private Pension System

The findings of the research point to findings that are contrary to the characteristics shared by the interviewees such as long-term thinking, long-term decision making in terms of money, and acting predominantly with the future in mind. This is because the research findings demonstrate that only 11% of the interviewees are currently included in the PPS and AES, and for 32% of those who left the PPS, the first reason is the mindset that they "manage their own money best." It is seen that one of the reasons expressed by the people who quit the PPS and AES is "I find the state contribution insufficient", with a rate of 24%. In brief, people's belief that they will manage their money best and that the state's contribution to the system is insufficient constitutes more than half of the reasons for leaving PPS and AES.

Overconfidence Bias Is an Important Factor in Explaining the Reasons for Households to Leave the Private Pension System

It is thought that these results can be explained by using the concept of "overconfidence bias" in the behavioural economics/finance literature. “Overconfidence bias” can be defined as the overconfidence of individuals in their own abilities, experiences, and knowledge without relying on realistic and solid foundations, and it results in ignorance of risks, and emerges as an important factor in the decision-making process. The situation can be evaluated as follows: Private Pension System, which aims to provide a relatively better life standard to individuals in their retirement, has been in practice since October 2003, and since January 1, 2013, the State has been making 25% of the contributions made by participants to their pension accounts. On January 1, 2017, AES, which has many advantages just as PPS, has been integrated into the system, and since then, savings of individuals have been professionally managed by portfolio management companies that are audited by the Capital Markets Board and direct the savings of individuals into long-term investments through pension funds. The system generates significant real returns in the long term with the right fund selection. One of the main reasons for individuals to leave the Private Pension System and Auto Enrolment System is the mindset that "I can manage my money the best", and it points to the existence of "overconfidence bias". The "overconfidence bias" appears to play an important role in the decision of individuals to leave PPS and AES.

Instructor Ramazan Baş

Instructor at Kütahya Dumlupınar University