Royal London's Steve Webb says employers looking for maximum bang for their buck should look to inertia rather than relying on engagement to effect change.
Despite a range of policies and initiatives to reverse the decline, including publicity campaigns, incentives and new products, falling membership seemed like an incoming tide knocking over everything in its path.
Only one thing has proved strong enough to reverse the decline – changing the way people make choices about pensions.
Looking at the issue through a behavioural lens is the best way to generate a step change in workplace pensions
Specifically, instead of requiring people to opt in to pension saving we make it the ‘new normal’ to be in but leave people free to opt out.
Auto-enrolment has succeeded
Staying-in rates have exceeded government expectations, with nearly nine in every 10 workers auto-enrolled so far choosing to remain in the scheme.
Even more encouragingly, among people starting a new job since auto-enrolment was introduced, staying-in rates are reported to be around 95 per cent.
Simply getting people into pensions is, however, only the first step. Apart from issues around those excluded from auto-enrolment (notably the self-employed), the key question is how to get these people to save more, particularly once the planned contribution increases in April 2018 and April 2019 have occurred.
There is a real danger that as an industry we will go back to thinking that engagement is the key.
If auto-enrolment teaches us anything, it is that changing defaults and changing the way people make pensions choices is likely to be far more powerful than even the best engagement campaign.
A powerful behavioural lesson
Consider, for example, the pension scheme run by the Nationwide Building Society. They offered a generous employer contribution but the full match was taken up by less than one in six staff.
Rather than simply send out more emails extolling the virtues of the pension scheme, the company switched the default so that the vast majority of Nationwide staff are enrolled at the maximum contribution rate but are free to opt down.
The result is that closer to five in six staff are now contributing at the maximum rate. While the new default arrangements had to be effectively communicated, and the firm worked hard on videos, websites etc., it was the default that created the sea-change in behaviour.
Other employers have seen dramatic improvements in contribution rates by encouraging workers to ‘pre-commit’ to future increases in contribution rates.
These schemes, analogous to the successful Save More Tomorrow arrangements in the US, harness the behavioural insight that people are far more willing to agree now to be virtuous tomorrow than to make sacrifices today.
But the result is the same – dramatic increases in the proportion of workers securing the maximum possible employer match.
Attention to detail is key
Behavioural economics is about more than getting the right defaults. It involves thinking through each step of the architecture that surrounds our choices.
Tiny details like whether people have to click once or twice on a website to get where they need to go, or the harnessing of social norms to help shape behaviour, can have an astonishing impact.
None of this is to decry the value of good-quality communications with members nor to devalue the excellent engagement that takes place in some workplaces. It is also clear that expert and impartial financial advice at key decision points is of great value to members.
But employers seeking to get maximum bang for their buck, in terms of promoting dramatic changes in employee savings behaviour, are likely to find that looking at the issue through a behavioural lens is the best way to generate a step change in workplace pensions.
Steve Webb is director of policy at provider Royal London
