Unless the government beefs up guidance, new pensions freedoms could undermine auto-enrolment and leave us with a pensions crisis


If the government was worried about obesity but simultaneously handing out free sweets, you’d have to question either their motives or their competence, wouldn’t you?

But that’s exactly what the current British government has done with pensions. Auto-enrolment (AE) largely exists because we believe that people are either incapable or unwilling to save for their future. At the same time, ‘freedom and choice’ makes the assumption that people are capable of making good decisions about retirement.


It doesn’t take a behavioural economist to tell you something’s not right here, but what behavioural science can tell you is the two policies aren’t just contradictory; they are underpinned by diametrically opposed assumptions about the way people work.

So what are the consequences of these conflicting ideologies for the pensions industry, and indeed the success of auto-enrolment? A new Barclays’ white paper developed by the team, which looks at the pensions reforms in April through the lens of behavioural finance, comes to a few conclusions.

Auto-enrolment isn’t perfect

Auto-enrolment is largely successful in overcoming the inertia barrier for those who otherwise would not be saving for a pension. Fundamentally, these people will be better off overall.

AE is more problematic, however, for those people who would have been engaged with pensions saving anyway. It can cause a problem where people assume that because they are auto-enrolled, it’s all taken care of. Sadly with currently minimum contribution rates and longevity estimates, that’s not even close to being true. So these people might end up worse off.

Nudging people to make pensions contributions creates better outcomes”

Greg Davies, head of the Barclays behavioural finance team explained: “It’s not necessarily enough to ensure that everyone is in the right situation for them.”

Essentially, nudging people to make pensions contributions creates better outcomes, but to ensure optimum outcomes, we also need to educate people to ensure they save more and in the right way.

Davies continued: “That engagement has long-term benefits as well because it’s only by having engagement over time that we do actually build up the confidence and the knowledge for people to start approaching the decisions when they’re decumulating with any degree of confidence.”

Freedom and choice

Far more problematic than the largely successful AE programme, however, are the new pensions freedoms. Davies said: “we now have a raft of behavioural issues that are going to be there that weren’t there before.”

This is largely because the assumptions behind auto-enrolment are right. If we can learn anything from the past it is that when left to their own devices, people make sub-optimal decisions.

By shifting to an opposing behaviour assumption at the finish line of the pensions process we are assuming people will act in a different way. When we look at the poor choices people made when choosing an annuity, it’s clear that this isn’t the case.

When left to their own devices, people make sub-optimal decisions”

Davies explained: “The assumption seems to be that in the intervening decades between when we nudged people into savings when they wouldn’t do it themselves, we now seem to believe that they have magically become able to assimilate large quantities of information in a short period of time and make optimal decisions for their future.”

Behavioural science also tells us that people are particularly bad at making choices when it involves money now, versus money in the future, or when complex decisions are involved, all elements in retirement decisions.

Davies continued: “Giving people choice on its own doesn’t seem to be that well grounded in our behavioural knowledge, because we know that if you give people complex choices, in an area that they’re not experts in, particularly one which involves trade-offs over time between actions now and outcomes in the future, these are all features that make people deeply uncomfortable.”


So how can we stop ‘freedom and choice’ leading to inevitable bad outcomes?

Davies believes the government has already given this some thought, which is why they’ve come up with the guidance guarantee. However, the industry as a whole is already convinced that guidance will not be enough  to help people make the right decision.

There is also some concern as to whether or not people will take up the new service.

The government needs to beef up the guidance guarantee”

The report found that because taking guidance is not compulsory, simply making the decision to take it requires more effort than the default of doing nothing. While providers are required to ‘signpost’ members to the guidance, unless appointments are made on behalf of members or they are pro-actively contacted, the action sits with the retirees and this will reduce uptake.

The government needs to beef up the guidance guarantee to ensure that people use it and that when it is used, it is designed in the right way to overcome behavioural bias and lead to good outcomes.  Otherwise, ‘freedom and choice’ could end up undermining the good work of auto-enrolment and creating a pensions crisis.