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