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John Lawson: We risk a job half-done on auto-enrolment


By some measures, automatic enrolment has been a rip-roaring success. By March this year, 6.1 million people had been auto-enrolled into a pension and 110,000 employers had registered their compliance. Only 10 per cent of those enrolled had opted-out.

But is this result really all that surprising? Auto-enrolment harnesses consumer inertia and the high number of joiners and low opt-out rates perhaps illustrate just how little interest people take in their pension. Even less interest, it would appear, than most pension professionals predicted.

Recent research we have undertaken points to a similar conclusion. Since the introduction of auto-enrolment, the number of private sector pension savers unaware of their fund choices, or that have never reviewed them, rose from 9 per cent in 2013 to 15 per cent this year. Across all defined contribution schemes 1.5 million savers do not even know what fund their savings are invested in.

Among employees of smaller businesses the picture is even worse, with nearly one in five unaware of their investment choice. And with the employees of some 480,000 small employers still set to be automatically enrolled this year, the number of those disconnected from their pension savings is only going to rise. While inertia may be a force for good in getting people saving, the same inertia makes it difficult to get those same people engaged with their savings.

Auto-enrolment still faces major hurdles before it can be declared “job done”. Ensuring that small employers carry out their duties is the number one concern today; by 2018 the biggest worry will be around whether increased contributions result in more opt-outs.

Indeed, our research indicates that affordability remains the top reason for opting out, which could prove a problem when employee contributions rise in 2018 and again in 2019. Thinking optimistically, inertia may save the day again if people cannot be bothered to opt-out even if the financial pain is more keenly felt.

That said, we already know that 8 per cent of band earnings is not enough but the Government says it has no plans to increase minimum contributions beyond that threshold. It looks likely other techniques that harness inertia, such as “save-more-tomorrow”, will need to be deployed as the solution to the problem of adequate saving.

The investment issue is a tougher nut to crack. Many people have no concept of what a fund is, never mind what equities and bonds are. Advice could be the solution here, if only people would seek it out. Worryingly, our research suggests only 4 per cent sought advice before reviewing their investment choices, down from 7 per cent three years ago.

It could be argued that employees do not need to consider their investment choices. After all, every scheme must have governors in the shape of trustees or an independent governance committee. Surely they are the experts that should be deciding what fund is best?

While pension scheme governors do spend a lot of time considering default fund choices, they are also constrained in that the default fund must be one-size-fits-all. Charge caps place additional constraints on default fund design.

What is clear is that we need to find a way to match appropriate investment solutions with each employee’s own particular needs – whether that is through advice, education or something else.

Even if the remaining phases of auto-enrolment are successful, the twin problems of adequate contributions and suitable investment choices will remain. Now is the time for the pensions industry to turn its attention to those problems or auto-enrolment will forever be a job half done.

John Lawson is head of financial research at Aviva



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Geoffrey Hartnell 7th June 2016 at 1:09 pm

    As soon as the final employer rolls out the scheme in April 2019 enrolment should become compulsory with no opt out option.Pot needs to follow member to avoid transient workers collecting inumerable small pots which become impossible to trace.Contibutions need to be increased in line with Australian models so that funding is more akin to final salary levels.
    Only large employers will even consider in house investment advice,which if it excludes the provision of advice for an individuals overall investment holdings runs counter to industry views of providing an ongoing holistic service to take in to consideration other asset classes held.

  2. Hi John,
    Agree a LOT can be done on customer engagement but we need to focus on what’s important to individuals rather than trying to explain how our products work.
    Most users of smart phones don’t know how their products work but they know what they need to do to work them. Similarly most pensions customers will never understand the intricacies of investment (or care that much) – they just would like to know what they will need to do to be able to retire – and I haven’t met a customer yet who isn’t interested in adequate retirement.
    So they need to know how to make the product work for them – which generally boils down to putting more money in (or adjusting retirement expectations or working longer). They should be able to trust the product provider to design a sophisticated product (eg default investment design) which will help them get to where they need to get to.
    There’s a lot more to go into (and I appreciate the regulatory challenges) but I very much believe as an industry we have most of the answers available to dramatically improve customer engagement (and a great piece of research from Aviva recently on what customers value).

  3. Fund choice is mentioned, but this is a complete farce as far as AE is concerned. A choice of what? 5 or 6 funds all of which are boring and hardly light the imagination.

    Proper fund choice and portfolio construction and interaction with the pension holder is well-nigh impossible as the premiums are derisory and adviser remuneration facilities are a non-starter. These sort of people won’t pay fees. Anyway, what sort of fee could you charge for a few quid a month?

    Sure, you have the benefit consultants bleating for compulsion so that they can twist the employers arm. The benefit agencies have a woeful record of helping clients. I earned fees advising and explaining fund choices to those in GPPs with the large benefit agencies. (Admittedly to the better off employees). Employers are not benefit agencies. What are you trying to achieve? The sort of farrago we have with the few remaining DB schemes? Where fewer and fewer schemes pay more and more to fund the PPF, which can’t cope anyway when there is a default. BHS anyone?

    For so-called pension professionals to get so gung-ho defies reason. Pensions are a political football – that’s why the public are disinterested. The rules change at 3 p.m. every Thursday. Who says that AE will even exist in 2025? How short is your memory? What happened to Stakeholder – that was supposed to be mandatory. The way Osborne is messing with pensions and ISAs we’ll be lucky to have any kind of savings culture. Just wait before you crow about opt out rates until the contribution levels increase. As for NEST – almost a 4% charge and run by TATA – those are pleasing thoughts!

    If there are those who are genuinely concerned (and I don’t mean with their business figures) then what we should be pushing for is a properly funded state pension. That at least is an honest tax, not the dishonest tax of AE. After all the UK pays the lowest state pension (as a percentage of average earnings) in the whole of the OECD.

  4. David Bennett 8th June 2016 at 8:21 am

    IMO, AE works fairly well for larger employers. For firms with a handful of staff or high staff turnover or both this will be a nightmare.

    Also it I’d fine wanting tailored fund selection, automatic transfer with change of employment, (what if they become unemployed) and member support/education) but who is going to pay.

  5. I do find it humorous when the Aviva’s of the world harp on about employee engagement et al when all they care about is creaming money from the assets under management and doing little in return – I wonder how many new and existing clients Aviva turned away at staging as their membership just wasn’t profitable business.

    AE is a great idea done badly.

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