The key to auto-enrolment's success is customer engagement as without it the epidemic of pensions under-funding will continue, writes Adrian Boulding.
Automatic enrolment has been one of the consistently positive stories in the retirement market in a sea of pension reform turmoil over recent years.
Opt-out rates have consistently outperformed early expectations. The latest numbers indicate that average opt-out rates are still around about 12%, although these numbers vary by age group, which definitely raises some early questions for the industry to ponder.
For example, official figures showed 23% of workers over 50 opted out in 2014, compared with 7% for those under 30 and 9% for those aged between 30 and 49.
Why do opt-out rates increase to 9% for those in the 30 to 49 age group? Are older people opting out in greater numbers because they don't think the contribution levels are high enough to build a viable pension pot? Why are employees not contributing more and are they even being asked to consider increases?
Lots of questions but not too many answers yet - so one key challenge is to understand this data better.
Up to the end of September last year, more than 5.47 million workers were automatically enrolled by about 60,000 employers.
However, this is a regime which relies very heavily on inertia for its success.
In other words, if you take no action to opt out then you end up in your employer's scheme. Many don't even know they are in it and possibly won't spot it on their pay packets until the percentages of savings taken from their salary go a good deal higher.
But inertia cuts both ways. If auto-enrolment members are not making a conscious effort to save into a pension, they are highly unlikely to take action to pay in more than the statutory minimum amount, which is currently 1% of qualifying earnings for both employer and employee.
In addition, the Department for Work and Pensions (DWP) says almost two-thirds (63%) of firms who have already staged are only contributing this legal minimum, which is not enough to build a reasonable retirement income.
Royal London director of policy Steve Webb highlighted the under-payment problem when he said: "The most worrying finding is that around three firms in five (in a survey of 3,000 private sector firms that Royal London conducted earlier this year), or 62%, that have started the process of automatic enrolment, are only contributing at the legal minimum of 1% of qualifying earnings.
"While it is great that membership of schemes is shooting up, it remains the case that for many workers, only tiny amounts of money are going in, and this is before we get to the smallest firms who seem most likely to contribute at minimum levels. Unless we can get workplace pension contributions up quickly to a more realistic level, we risk facing a generation of workers who simply cannot afford to retire."
Of the employers that are phasing in contributions, 85% are planning to contribute the minimum - which reaches 3% for employers in 2019. Of those firms yet to stage, just 14% expect to contribute above 3%.
So if under-payment is the real problem for up to ten million newly auto-enrolled by 2019 when the last staging dates go through, customer engagement has got to be the answer to getting these ‘newbie' retirement savers putting in more. It is not helped by the fact that less than one in ten employers are offering regulated financial advice alongside auto-enrolment.
There are several techniques employers and providers alike can make use of in the absence of full financial advice.
Let's look at a few of them:
For the youngest group, those in their 20s, ‘social norming' is one way to stimulate customer engagement. Employers or providers (perhaps through the upcoming pensions dashboard) will have to develop big data-based tools which will be able to tell scheme holders what the average percentage of earnings among their contemporaries is.
If they find out from this analysis they are paying £50 less into their pension than is the norm, this might well stimulate them to raise their game and put in £60 more. It is simple behavioural economics but it is well-proven to work.
There are other techniques that have been proven to work elsewhere in the world. For instance, savers may be enticed to ‘save more tomorrow'.
The idea is to encourage newly enrolled employees to pledge to increase their savings by say 1% per year. This might be something that firms' HR & payroll departments could spear-head with a view to getting a larger percentage of their staff contributing enough to be able to retire at a reasonable age (say, at 65 years old).
This is widely deployed in US employer schemes and apparently with good success.
Also - although perhaps counter-intuitively - times when new saving options are being presented to employees, such as the Lifetime ISA (LISA), are a good opportunity to have a chat about saving more altogether.
LISAs offer a tax-efficient method of saving towards a deposit for first-time buyers.
They also offer an incentive to keep saving until age 60 - making them a potential competitor for the employer auto-enrolment pension.
Explaining the options in an accessible way through graphs, pie charts and projections, and comparing the merits of each option, may well entice policy holders to invest more.
It's important to always highlight any progress in people's retirement saving and projected income. When pre-set savings thresholds or policy anniversaries are reached, why not send a text message or email of congratulation, which states how much they've saved this year and how well their asset selections have performed.
By reinforcing positive behaviour and investment performance employers can persuade the ‘momentum investor' to increase their investments. It's the principle of the pension being seen to be working positively, that will get the investor to keep building on that momentum by contributing more in the quest for further rewards.
Annual staff appraisals, even if they are not necessarily accompanied by pay rises these days, are still times for employees to think about what they've achieved in the last year and to plan targets for the next 12 months. What about setting a higher target for saving in an employer scheme while they are in this reflective mood?
Finally, many employers have been forced by financial pressures to row back too far from their former paternalistic duties of looking after employees (and their families to a certain extent) right through to retirement. The number of corporate defined benefit (DB) schemes closed or significantly under-funded testifies to that.
But for auto-enrolment to come anywhere near the former success of DB schemes, there is a need to redress the balance - charging HR departments and contracted employee benefits specialists alike with the task of encouraging staff to save more than the statutory minimum amounts.
Ideally, employers should lead by example and make a point of giving more than is demanded of them.
Adrian Boulding is retirement strategy director at Dunstan Thomas
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