The pensions world may have been overly pessimistic about auto-enrolment, but auto-escalation could change everything, writes Peter Crush
Psychologists, criminologists and sociologists all say that despite what people may think, human behaviour is actually very predictable. In fact, according to one study, it’s 93% so. But when it comes to pensions, no prediction ever seems to be that accurate.
When automatic enrolment (AE) was first conceived, for example, apocryphal forecasts were made about its almost certain failure. The pensions industry regularly scaremongered opt-out rates of 30%; the government itself was predicting 15% as recently as 2014, while the latest official data shows it’s somewhere around the 8-9% mark.
But if you’d thought the lessons had been learned, the next stage of AE – planned rises in employer and employee contributions from 2018 (to reach 8% combined contributions by 2019) - are driving similar apocalyptic estimates.
‘Opt-outs will rise to 33% among millennials,’ claims recent research by Royal London (in contrast to the 71% of young people who have actually stayed in their workplace pension).
We need devices that help employees accommodate more saving”
Meanwhile, Hargreaves Lansdown says the government’s own calculations point to optouts of 21.7% in 2018, rising to 27.5% by 2019 – the equivalent of one million people choosing to say no. If so, it would dramatically reduce the 9 million new pension savers created since 2012.
“I’m not certain there’ll be mass opt-outs,” says Jeanette Makings, head of financial education at Close Brothers. “It didn’t happen when AE came in so on that basis, I don’t thinkit will happen again.
“That said,” she adds, “what will be needed are devices that help employees accommodate more saving, such as changing the benefits proposition to include offering discount vouchers on everyday shopping, to creating what we call ‘room to save more’.”
Makings admits that on a practical level, this does mean that human resources departments will be forced to come up with initiatives that disguise the contribution rate rises, simply so staff don’t notice it so much.
However, she also accepts that techniques such as auto-escalation (whereby contribution rises are camouflaged with pay rises), can only go so far, and that what HRDs will really have to do is focus on better lifetime saving – a much harder task.
We’ll be campaigning for 12%”
“Come 2018, employers won’t be able to hide from having conversations about appropriate savings levels,” says Tim Gosling, policy lead, DC, Pensions and Lifetimes Savings Association.
“The rises in contributions had to happen because 8% is really the minimum people need to save, and realistically it needs to be more – we’ll be campaigning for 12% – so employers will have to start planning for how they can broach these tough issues.”
This won’t be easy. The changes effectively mean an average earner’s pension contribution will rise from £18 to £74 by 2018 and £92 by 2019 – money that will surely be noticed.
“The only answer is education,” says Kate Smith, head of pensions at Aegon. “HR needs to be telling the longer story about workplace savings, so that a savings habit rides out more short-term events such as possible interest rate rises and tax changes.”
Those that are proactive are seeing value. In 2015 Nationwide pre-empted AE’s contribution rises by three years, to set up an employee core minimum of 4%. It changed its core contribution of 5% (for those with less than two years’ service), and 9% (for those with more than two) to 13% for all, no matter how long they’d worked for the building society.
Since the change, 84% of staff now make additional contributions”
It will also now match any additional contributions, up to 3%. The change was trailed for six months, with a bespoke ‘Don’t Just Dream it, Plan it’ communication plan.
Ian Baines, Nationwide’s head of pensions, says: “We recognise it was an unusual step, but it was inspired by the successful rollout of AE in the first place.”
He adds: “We used behavioural theory with great effect, to bring the retirement story to life, including creating a short, light-hearted, animated film. Before the changes, only 9% of employees paid more than the minimum contribution rate of 4%. Since the change 84% of staff now make additional contributions.”
Nationwide’s experience illustrates just how pivotal the role of the employer is in changing their employees’ savings habits. For if one thing is predictable, it’s that without alternatives, most people follow a path of least resistance
Nationwide’s Ian Baines will be talking at the Pensions Communications Forum about how it communicated increasing contributions with staff. To book your place, click here.
Following the employer’s lead
Research by Aon Hewitt shows 60% of staff will simply contribute what they’re offered by their company. It also found that if an employer defaulted to a higher rate, even if people chose to contribute a little less, 80% wouldn’t go lower than what they were on before.
Some positive news on the horizon is that while there’s plenty of data showing the parlous state of most people’s finances, there’s also an emerging narrative that shows some elasticity around savings.
A recent poll by Prudential found that among workers who were already saving through AE, more than half (51%) said they could afford to save more.
In fact, 29% said they could actually afford to save an extra £100 or more each month. So, the clear message is, they simply need to understand the value of saving.
Time is marching on, and employers really have no place to hide”
What’s less good news is the lack of time HRDs have to change habits. The Pensions Management Institute finds 72% of workers don’t even know about the rise. And there is evidence, too, that employers could cut other benefits to pay for their share.
But if the message about the next few years really can be summarised, it’s that all these complex issues will need to be faced by employers – whether they want to be involved in people’s finances or not.
HRDs that fail to do so could be left with older, disengaged staff, who are staying put, simply because they can’t afford to retire.
Commentators firmly believe there will be large opt-outs starting next year, because disposable incomes will have shrunk. Time is marching on, and employers really have no place to hide.
This article originally appeared in the DC landscape report. To get the full report, click here.