From the blog: Steve Webb recently argued that changing how people make choices is the “one thing” that has reversed the fall in membership of workplace pensions.
He’s certainly right that auto-enrolment has been a phenomenal success thanks to the insight that if people are opted in by default, participation rates will soar.
He’s certainly right that auto-enrolment has been a phenomenal success thanks to the insight that if people are opted in by default, participation rates will soar.
Making the effort to engage savers about their pensions is arguably not just the right thing to do; it may turn out to be the smart thing too
Nevertheless, for reasons of both principle and practice, it would be dangerous for the pensions industry to comfort itself that engaging members is an unnecessary luxury.
As of today, employee contributions stand at a minimum of 1 per cent of earnings. In April, this rises to 3 per cent, and the following April to 5 per cent, or 8 per cent including employer contributions.
Higher contributions will be deducted from workers’ pay cheques on the same basis, namely without employees needing to make active decisions. This makes perfect sense. Why fiddle with an approach that has worked so effectively in bringing people into the system?
Still, the risk that people opt out seems likely to rise in line with higher contributions, and even 8 per cent falls well below the level most experts believe is sufficient.
Engaging members of schemes about why it’s in their interest to forgo income today could play a valuable role in both limiting growth in opt-outs and encouraging contributions above the contribution minimum.
Webb cites the Nationwide staff scheme, which switched to defaulting employees into the maximum contribution rate, with great success. It is striking, however, that Nationwide chose to invest in an extensive education campaign to secure employees’ informed consent for bigger deductions into the scheme.
This combination of higher default contributions and a programme to engage staff on the merits of a decently funded pension pot delivered fantastic results.
In the pre-auto-enrolment era, scheme participation rates in different branches of the same retailer could be wildly different, thanks to some store managers making the effort to explain to staff the benefits of their company scheme. Yes, engagement has its limits, but it also has its uses.
Engagement is also important for another reason. A new EU regime on data protection will be introduced in May, guided by the principle that consent “must be a freely given, specific, informed and unambiguous indication of the individual’s wishes”. That’s a high bar for an area where, arguably, there’s less on the line than in a pension product.
Defined contribution pensions are unavoidably risky. Markets go up and down, and some default funds will perform a whole lot better than others.
Whether this is a valid reason to shield savers from information on the risks and realities of their investment products is a question policymakers must grapple with as they review auto-enrolment. Savers will encounter these realities aged 55, if not before.
From the industry’s point of view, making the effort to engage savers about their pensions is arguably not just the right thing to do; it may turn out to be the smart thing too.
Catherine Howarth is chief executive of campaign group ShareAction
