PLSA Investment Conference 2017: With the Department for Work and Pensions’ review of auto-enrolment underway, advisory groups are seeking views on engagement, contributions and coverage, but questions remain over the necessity of engagement and the pensions reality in other countries.
The government announced a 2017 review of auto-enrolment in December last year, with a view to considering the success of auto-enrolment while exploring ways in which the policy can be further developed.
Sometimes, by explaining difficult concepts, people are happy to have understood that concept and then say, 'This is not for me'.
Paul Todd, Nest
Speaking at the Pensions and Lifetime Savings Association’s Investment Conference 2017, the three advisory group chairs – Jamie Jenkins, head of pensions strategy at insurer Standard Life, Ruston Smith, group director people, pensions and insurable risk at Tesco and Chris Curry, director of the Pensions Policy Institute – called on the industry to give their views.
Is engagement always good?
One of the core aspects of the review is member engagement. Smith, who leads the engagement area of the review, said it was about “how to improve engagement to increase a sense of personal ownership”.
Smith said the industry could learn from other countries, particularly the US, Australia and the Netherlands. He noted that the US has “a mature 401(k) culture” and that young people “who are not in 401(k) plans actually understand them and talk about them – so how can we create that?”.
He argued that “we’ve got a great opportunity to look at the journey that they have been on”.
But Chris Hitchen, chief executive of the Railways Pension Trustee Company, questioned the idea of looking at engagement as part of auto-enrolment.
He said: “The whole idea of auto-enrolment, I thought, was based on doing the right thing for people even though they wouldn’t engage… let’s not bin that just because we now have freedom and choice. Let’s stick to that principle.”
Smith pointed out, however, that “we’re not looking at engagement as a short-term strategy”. He said that while inertia has been very important, “this is about learning and getting it right for the future”.
Criticism was also levelled at the picture painted of the situation elsewhere. Steve Charlton, defined contribution proposition manager at Vanguard, said: “One bubble to burst… is that engagement in the US in 401(k) is not as good as you think it is.”
He noted that it was a struggle getting US savers engaged, even for one of the big providers of 401(k) plans.
Charlton said auto-enrolment works where it is put in place voluntarily by employers and is linked with auto-escalation and engagement, “and therefore fund values go up tremendously”.
Paul Todd, director investment development and delivery at mastertrust Nest, said engagement was too readily portrayed as positive per se, when “what we have found at Nest from some of our research is that sometimes engagement can actually be a negative thing”.
He argued that “sometimes, by explaining difficult concepts, people are happy to have understood that concept and then say, 'This is not for me'”.
Todd added that the auto-enrolment review should therefore also discuss the areas in which engagement is not a good idea.
Contributions review will take longer
Curry outlined the contributions aspect of the review, which he was appointed to lead. “We’re starting the discussion around contributions now, but it’s going to take much longer… than the discussions we’re talking about on coverage and on consumer engagement,” he said.
This is because “there’s a very strong link, obviously, between what happens in coverage and what happens on consumer engagement as to what we might want to think about in terms of long-term contributions”, he explained.
AE review prompts calls on contributions and self-employed
The government has this week appointed an advisory group to support its 2017 auto-enrolment review, as the industry calls for more action to increase coverage and contribution rates.
He said recommendations on contribution levels could not be made now as the industry does not yet know how individuals are going to react to the current contribution rates.
“It’s clear that more money needs to go into pensions or long-term saving in order to help people through their retirement. What we want to do here is look at how much of that needs to be through automatic enrolment and how much of that comes through other forms,” he said.
Curry mentioned the attraction of the Save More Tomorrow scheme in the US as offering a middle way between the binary choice of being in or out of auto-enrolment.
He said: “It will be interesting to see whether that is more effective in getting the right people to stay in, whereas an increase in the minimum might cause opt-out.”
Francois Barker, partner at law firm Eversheds Sutherland, said Save More Tomorrow “is just a logical development: people are giving up money they have never had, and therefore it’s easier to give it up”.
However, he highlighted that this might cut across engagement because it is “effectively relying on apathy in the future”.
