Need to know:
- Small changes can make a big difference when it comes to engaging employees with workplace savings schemes.
- Behavioural science is all about working with people’s natural habits, instead of against them.
- Left alone, savers can struggle to imagine their future selves. There are many smart ways to help them overcome this.
A British cyclist had never won the Tour de France before the now-legendary coach Dave Brailsford joined the team. It aimed to achieve its goal in five years and ended up doing it in two-and-a-half, with Bradley Wiggins scooping the prize in 2012. How? Through a series of marginal gains: making small improvements that added up to a very big difference.
When employers are coaching their employees in their own savings ‘Tour de France’, it is important to remember that simple tactics can have big results. There are some behavioural techniques that can make a big difference when it comes to engaging staff with their finances, benefits and savings.
Play on inertia
One approach, which is widely used in the US, is that of Save More Tomorrow, which uses the same underlying principle as auto-enrolment. Save More Tomorrow was conceived by behavioural economists Shlomo Benartzi and Richard Thaler. Upon signing up, employees do not have to give up any money straight away but whenever they receive a pay rise, their employer will increase their pension contributions.
That principle is status quo bias, explains Matthew Blakstad, head of member proposition at the National Employment Savings Trust (Nest). “Status quo bias is the idea that we tend to keep doing the same thing that we were doing 10 minutes ago,” he says.
Auto-enrolment directly combats status quo bias by reversing the default: now, employees are saving into a pension and have to make an effort to leave it, rather than vice versa.
There is nothing to stop UK organisations from emulating their US counterparts and implementing Save More Tomorrow, sometimes referred to as auto-escalation. Construction firm Knight Harwood is one UK employer that chose to take this approach (see case study box). Alan Morahan, head of defined contribution (DC) consulting at Punter Southall, which advises Knight Harwood’s scheme, says: “Auto-escalation is commonly used in the US but has not really caught on in the UK. However, as the Knight Harwood example demonstrates, it can be made to work and, in my view, undoubtedly results in higher levels of contribution than would otherwise be the case.”
Differentiate communication methods
Interestingly, communication preferences differ among employees, whether it is face-to-face, one-to-one, or group presentations. However, with presentations it is easy to dwell on the importance of a particular concept without giving people the tools to apply it, says Hannah Lewis, director at communications agency Behave London. “Behavioural finance is all about removing the barriers and letting people do it for themselves,” she adds.
Push and pull
Employees engage in different ways. That is why it is important to push out information as well as giving staff access to resources so that they can pull out their own information. For instance, if an organisation decides to launch a share scheme, it is a good idea to proactively push out information to staff in the form of seminars, explains Jonathan Watts-Lay, a director at Wealth at Work. But it is also helpful to follow up with a ‘pull’ in the form of links to online content; perhaps online animations with links to more detailed information. That way, employees can engage with information on their own terms, according to how relevant they deem it to their own circumstances, and learn in a way that suits them.
Savings on the go
A key principle of behavioural science is working with people’s existing habits. Skip McMullan, chair of trustees for the Bank of America pension scheme, realised that smartphones were drastically changing people’s behaviour.
Accordingly, the scheme developed an app that members can access on the go. They can change their fund choices and model the impact of changing their contribution rates at the push of a button.
An added bonus is that the employer can track members’ online behaviour, says McMullan. For example, the trustees map members’ risk appetites by age and location and tailor their communications accordingly.
Damian Stancombe, head of the workplace health and wealth team at Barnett Waddingham, adds: “We are moving into a world where it’s all about personalisation. Delivering messages that are relevant to a saver’s age and affluence are vital.”
Humans are poor at responding to events that feel far off, says Nest’s Blakstad. Our perceived value of a future benefit drops off a cliff when it is more than two years away.
Nest combats this via a campaign called Tomorrow’s Worth Saving For. “We all enjoy small pleasures today and we have an emotional relationship to them,” explains Blakstad. “These are exactly the sorts of things we want to carry on doing when we’re older. So rather than trying to force people to think about their circumstances in retirement and do the right things, we ask them to think about what they enjoy today. That seems to really resonate with people.”
Engagement is all in the way an employer tells a story. Watts-Lay cites the example of share schemes which, especially when the investments are later put into a pension scheme, can help employees double up on the tax relief they receive. “But rather than saying to employees, ‘Let’s talk about share schemes,’ go out with the message: ‘We can help you save money’.”
Knight Harwood embraces auto-escalation
Construction firm Knight Harwood’s group personal pension scheme started with a contribution basis of 3% and 3% and introduced the concept of auto-escalation, through what it calls the Pension Increase Pledge (Pip). This gives members the option to commit to increase their pension savings by 1% each year for a maximum of seven years.
John Knight, the organisation’s managing director, says: “As a responsible employer, Knight Harwood has always been committed to providing a quality pension scheme for our staff and that is why we supported the concept of auto-escalation through what we call the Pension Increase Pledge.”
The increase takes place on the scheme’s anniversary of 1 March. It applies to members who have opted for Pip and have been members of the scheme for six months. Contributions above 3% qualify for national insurance rebates, so this applies to all Pip increases. Members can opt out of Pip at any time.
Having established the rules at the outset, the scheme has found auto-escalation relatively straightforward to administer. Knight Harwood was a start-up business and when the scheme was introduced it only had nine employees, all of whom joined the scheme, with seven opting for the Pip. Of these, five have completed the full increase programme, one stopped the increase once their contributions reached 6% and the other has left the firm.
Over the years, a number of other employees have completed the full pledge and many more are part way through.
Viewpoint: Why employees do not naturally engage with workplace savings schemes
The world overloads us with information at every turn and our minds do not like it. Detail clings to financial advice, on the other hand, like so many limpets. Of course it does: advisers need the detail to consider eventualities, recount sub-clauses and cover their backs. But our minds quickly fall prey to information overload.
People deal with this in various ways. The first is through mental shortcuts, or heuristics. We love to think we are rational beings, carefully considering available options, but for the sake of brain efficiency, we cannot often afford to be. Instead, we make decisions based on what feels right. We use association, automatically relating what we see to previous experience and responding in line with how we are used to behaving.
We are also driven by a strong aversion to regret. Faced with too many options, or options we just do not understand, we tend to sidestep them. This is why auto-enrolment was a smart move. Making the most desirable option the default is something we should be doing more generally, more often.
Another inherent challenge with choices in pay and benefits is that they require us to balance current and future needs. This is also something we are inherently bad at doing. We place more value on the former than the latter. This can be seen in employee responses to pension contributions. A typical twenty-something will wish their employer put less into their pension pot and more into their pay packet. Cake now rather than a feast later is our instinct.
There is no silver bullet to these challenges but good communication is vital. Simplify options so the average employee can make meaningful choices. Make the most desirable options the easiest to follow. Drive home the importance of making the right choice, making use of another strong influence, that of peer pressure and our fear of being out of line.
Jonny Gifford is adviser, organisational behaviour and research insight, at the Chartered Institute of Personnel and Development (CIPD)