Member engagement is good, but inertia is better

But there is a tension at the heart of the auto-enrolment policy. That is the balance between harnessing the power of inertia at the beginning of pension saving and needing engagement to deliver good outcomes at the end.

Most commentators would agree that 8 per cent contributions of band earnings is not enough for the vast majority of people to achieve a decent outcome in retirement. The received wisdom is that contributions closer to 12 per cent of full earnings would be more appropriate for the majority of people.

The Pension Commission suggested that voluntary saving would be required on top of the auto-enrolment minimum contributions to achieve its suggested target replacement rate of two-thirds of an average earner’s salary. 

Big communications budgets are lovely, but what if we spent our time and effort on better defaults instead?

Defined benefit schemes set members up with adequate contribution rates that led to good replacement rates. The journey into retirement was pretty seamless, and an income for life was baked in. If defined contribution is trying to emulate the warm glow of DB, it has got a lot more to do.

Engagement doesn’t always lead to a beautiful relationship

Engagement can lead to better outcomes, which is what it is all about. And it can build stronger connections between schemes and their members.

You would no doubt expect me to say that success is all about better engagement. Have good conversations with people, communicate clearly and put yourself in their shoes – that is the secret sauce that will lead to better outcomes. Spend big budgets on fancy communications programmes and that will solve many of the problems pension savers face. 

Big communications budgets are lovely, but what if we spent our time and effort on better defaults instead?

Behavioural biases and, in particular, the power of inertia are characteristics that are programmed into our species. They are powerful and very hard to counteract.

The survival of our ancestors often depended on our in-built mechanisms to sense danger or take action without thinking about it. To focus on immediate problems rather than dreaming about the future. When it comes to long-term saving, changing behaviour means overcoming these biases.

So what is the point in fighting against this? Why oppose nature by trying to interest people in a distant, intangible future? What if long-term success in pensions is delivered through harnessing behavioural science and using inertia to drive better outcomes?

That is the foundation of auto enrolment’s success. Let us make sure that if people are automatically saving, then they automatically save enough and automatically get a decent retirement outcome too. We cannot just rely on engagement and people making an active decision to achieve the results we want to see.

Engagement on top of defaults

Collective defined contribution and clever at-retirement defaults are exciting steps in this direction.

But in the absence of defaults at every step of the journey, and defaults fully doing their job, let us see where we can help. Let us listen to members and consider their needs, motivations and priorities. Let us design better content, journeys and experiences for them – we are a long way off defaults delivering the best possible outcomes all by themselves.

There will always be a need for some engagement to deliver better outcomes. That is not about product or investment solutions, but it is about understanding people’s needs and wants.

It is about having that conversation with people in channels they already use, to find out when they want to retire and what their financial aspirations are.

These types of conversations are the ones that we need to be having to help people make the most of their retirement savings. Get better at this and we will be delivering so much more for scheme members.

So while strong defaults are great, we need to think hard about how we understand scheme member needs and best engage with them. We need to be human-centred and user-driven, to understand what they need and the barriers to them achieving good outcomes.

We need to create a positive vibe around pensions and help people when they want to engage and when they need to make a decision. 

Auto-enrolment has had a great first 10 years, but we can do better, both through harnessing that inertia that we know works so well and through communicating more effectively with scheme members.

Simon Grover is a director at Quietroom