Auto-enrolment alone won’t secure long-term commitment to retirement saving

Published: January 29, 2014

“...inertia driving high levels of enrolment early in the process could soon turn to mass exit activity later.”

New research out this week from the National Employment Savings Trust (NEST) paints a relatively positive picture of auto-enrolment, with the chief executive claiming that people’s predilection for inertia is working.

Opt-out rates for the new workplace pensions scheme are averaging 10%, well below the 30% level that early Department for Work and Pensions research and doomsayers predicted. Saving for retirement has risen dramatically up people’s priority list, jumping from seventh in 2011 to third place in 2013. And, with a drop in the percentage of consumers saying they are confident that their current and future saving will be enough to provide for them in retirement, perhaps we are entering a new era of realisation and responsibility.

However, look beneath the surface, and not all is quite as rosy as it may appear. The ‘average’ opt-out rates no doubt hide big discrepancies for different employers, regions and age ranges. As NEST’s news release highlights, opt-out rates are double the average among people aged 50 and over – precisely the group of people set to hit retirement soonest. No further breakdown is provided.

To date, auto-enrolment has only affected people working at the UK’s largest employers – organisations relatively well-equipped to roll out admin heavy workplace pension schemes. With more than a million smaller businesses set to hit their staging date over the next two years, opt-out rates are likely to rise dramatically. NEST’s own research shows that many of the 30,000 businesses affected in 2014 are ill-prepared to carry out auto-enrolment.

Work can be done to inform and educate businesses about their legal duties, with a whole suite of consultancies, advisers and providers eager and ready to offer their help to employers.

But interestingly, while playing to inertia has undoubtedly helped to drive the present high enrolment levels, it could become the key reason for opt-outs in the future. Research Linstock conducted for Fidelity Worldwide Investment last year showed that failure to make an active choice reduces commitment to a particular course of action. This effect is even more pronounced when faced with bad or mixed news, especially if people receive three successive pieces of bad news. For example three successive periods when pension investments fail to reach the investor’s expectations.

Tucked away at the end of the research report, NEST highlights that “many people expect their pensions to grow in a uniform upward fashion”. This misunderstanding of how investments work could be a further catalyst for opt-outs as the stock market, and the value of people’s pensions, inevitably ebbs and flows over the coming decades.

So, while it is good news for NEST for now, lots more work needs to be done to help business administrate auto-enrolment. And, perhaps more importantly, other key lessons from behavioural economics need to be heeded to ensure people stay enrolled over the long term. If not, initial inertia driving high levels of enrolment early in the process could soon turn to mass exit activity later.

Simon Maule

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