Informed inertia will be key to minimising opt-outs once the increases hit in April
Nobody likes receiving bad news and all too often it is the messenger that gets shot. But with around 10 million people facing compulsory increased pension contributions from 6 April, isn’t it about time we started talking to policyholders?
The first half of the phased rises under auto-enrolment will see employee contributions increasing from 1 to 3 per cent of qualifying earnings, while the employer contribution rises from 1 to 2 per cent.
From next April, those minimum contributions rise again, to 5 per cent for employees and 3 per cent for employers.
The Government has adopted a very “softly, softly” approach to telling people about these rises. Yes, they have auto-enrolment pension awareness adverts on TV and among other media right now but none mention the increases. Instead, they have adopted a “get to know your pension” message, in the hope people will take the trouble to go and discover the news themselves.
I prefer an approach that fits more closely with the ethos of auto-enrolment – something I am calling “informed inertia”.
Employees should not be surprised when their first payslip after 6 April shows less take-home pay. But, equally, we do not want them to be taking any adverse action. We want them to just let the change happen via inertia.
From a behavioural point of view, it is never a good idea to give people too much notice of bad news. If they spend a long time worrying about the affordability of future contribution rises, they may do something silly like coming out of the pension scheme altogether.
This suggests we need a concentrated burst of communication activity from the industry and employers over the next few weeks. And it is not just information we need to get out. We also need to reinforce the benefits of auto-enrolment.
The basic message is the same as for any first pension sale. Do you want to rely on the state in retirement? That means an income of around £155 per week, or less if you have an incomplete employment history with gaps not covered by carer’s credits. The state pension offers breadline living throughout what should be some of our most carefree and enjoyable years.
Position the contribution increases as a good news story. Remember, the key for workplace pensions is that if you pay in as an employee, your employer pays in too. So the message ahead of 6 April should be “the more you pay, the more your employer pays”. Now is the time to get that message out.
Inaction is not an option
The increases are a legal requirement and the Pensions Regulator will be watching out for any employers that either do not put it through or have suspiciously large numbers of staff stopping pension contributions.
Inaction is not an option, so take the chance to reinforce the value of saving more for a comfortable retirement. And remember to present it as a good news story so the messenger will not get shot.
Adrian Boulding is director of retirement strategy at Dunstan Thomas