Automatic-enrolment has changed the landscape for workplace pensions in the UK, so now it is the norm for employees to be saving in a pension, with a contribution from their employer. But getting people saving is only the start; there is still plenty more that employers can do to make sure that their employees are saving enough for a good retirement. Not only will that improve the wellbeing of employees in the workplace, but it will also give employees and employers more choices around retirement.
Two alternatives are often proposed as to how employers can help employees save more: engagement and inertia. Engagement can often prove difficult; the Consumer engagement: The role of policy through the lifecourse report, published by the Pensions Policy Institute in 2017, highlights all the reasons employees find it hard to make active choices around their retirement savings. Complexity, myopia, mental short cuts and sometimes fear of getting it wrong can all lead to people avoiding even thinking about the subject, let alone taking action.
But it is possible, sometimes, to overcome these barriers. Good communications, which the employee feels is relevant to them and their situation, delivered at the right time and in the right way can have an impact, especially if it coincides with a ‘teachable moment’: a point in life such as just starting a job, buying a house, having children, or getting married, where people are more likely to engage in thinking about the long term.
But good engagement is not easy, and needs to be well designed for a specific audience. The alternative, use of the inertia that has made automatic enrolment so successful so far, can be more effective for more people. Evidence from the US, Save more tomorrow: Using behavioral economics to increase employee saving, published by Thaler and Benartzi in the Journal of Political Economy in 2004, suggests programmes that build on automatic-enrolment, such as Save More Tomorrow plans where employees commit to increase contributions in the future rather than straight away, can eventually lead to contribution rates over 10% of salary, with most employees staying in the scheme. However, research also shows that Save More Tomorrow is more effective if the plan and the benefits of saving have been explained at length to the employees before they sign up. So perhaps the best approach is not engagement or inertia, but a combination of the two.
Chris Curry is director at the Pensions Policy Institute