Customer engagement is closed-book providers’ biggest challenge
17 May 2016
Automatic enrolment (AE) has been one of the consistently positive stories in the retirement market in a sea of pension reform turmoil over recent years. AE opt out rates have consistently outperformed early expectations. The latest numbers indicate that average opt out rates are still around about 12%, although these numbers vary by age group. For example, 23 per cent of workers over 50 years old opted out, compared to seven per cent for those under 30 years old and nine per cent for those aged between 30 and 49 years old (see Figure 1).
Source: DWP in ‘Automatic enrolment opt out rates: Findings from qualitative research with employers staging in 2014’, dated November 2014.
Up to the end of September 2015, more than 5.47 million workers were automatically enrolled by over 60,000 employers. However, this is a regime which relies very heavily on inertia for its success. In other words, if you take no action to opt out then you end up in your employer’s scheme. Many don’t even know they are in it and possibly won’t spot it on their pay packets until the percentages of savings taken from salary go a good deal higher.
But inertia cuts both ways. If AE members are not making a conscious effort to save into an AE pension, they are highly unlikely to take action to pay in more than the statutory minimum amount which is currently 1% of qualifying earnings for both employer and employee.
In addition, the DWP says almost two-thirds (63 per cent) of firms who have already staged are only contributing this legal minimum which is not enough to build a reasonable retirement income. Royal London’s director of policy, Steve Webb, highlighted this under-payment problem as follows:
“The most worrying finding is that around three firms in five (in a survey of 3,000 private sector firms that Royal London conducted earlier this year), 62 per cent, that have started the process of automatic enrolment are only contributing at the legal minimum of 1 per cent of qualifying earnings.
“Whilst it is great that membership of schemes is shooting up, it remains the case that for many workers, only tiny amounts of money are going in, and this is before we get to the smallest firms who seem most likely to contribute at minimum levels. Unless we can get workplace pension contributions up quickly to a more realistic level, we risk facing a generation of workers who simply cannot afford to retire.”
Of employers that are phasing in contributions, 85 per cent are planning to contribute the minimum – which reaches three per cent for employers in 2019. Of those firms yet to stage, just over one in ten (14 per cent) expect to contribute above three per cent.
So if under-payment is the real problem for up to 10m newly auto enrolled by 2019 when the last staging dates go through, customer engagement has got to be the answer to getting these ‘newbie’ retirement savers putting in more. It is not helped by the fact that less than one in 10 employers are offering regulated financial advice alongside AE.
There are several techniques which employers and providers alike could be looking at in the absence of full financial advice. Let’s look at a few of them:
For the youngest group, those in their 20s, Social Norming is one sure fire way to stimulate customer engagement. Employers or providers (perhaps through the upcoming Pensions Dashboard) will have to develop big data-based tools which will be able to tell scheme holders what percentage of earnings are the average amongst your contemporaries earning similar amounts of money and perhaps with similar other financial status (renting in London or home owners in the home counties for example).
If you find out from this analysis that you are paying into your pension £50 less than the norm, this might well stimulate you to raise your game and put in £60 more. It is simple behavioural economics but it is well-proven to work.
There are other techniques which have been proved to work elsewhere in the world. You might be stimulated to Save More Tomorrow. Essentially the idea here is to encourage newly enrolled employees to pledge to increase saving by say 1% per year. This might be something that firms’ HR & payroll departments could spear-head with a view to getting a larger percentage of their staff paying enough into to retire on at a reasonable retirement age (say 65 years). It is apparently widely deployed in US employer schemes apparently – with a good record of success.
Counter-intuitively perhaps when new saving options are being presented to employees, it is also a good time to present communications about saving more for retirement. So for example, employers (or adviser firms working on behalf of employers) may well be planning communications to employees aged under 40 linked to Lifetime ISAs (Lisas) which come into effect next April. Lisas offer a tax efficient method of saving towards the deposit for first time buyers. They also offer an incentive to keep building savings in it until age 60 – making them a potential competitor retirement income building scheme for the employer’s AE pension. Explaining the options in an attractive way through graphs, pie charts and projections, comparing the merits of each option, may well stimulate policy holders to invest more.
Also it’s going to be important to highlight any progress in your retirement savings and resulting projected income. When pre-set savings thresholds or policy anniversaries are reached, why not send a TXT or email a message of congratulation which states this is how much you’ve saved this year, and this is how well your asset selections have performed. By reinforcing positive behaviour and investment performance you stimulate the Momentum Investor to increase investing. It’s the principle that if the pension is being seen to be working positively, this will stimulate that investor to keep building on that momentum by putting more in in the quest for further rewards.
Annual staff appraisals, even if they are not necessarily accompanied by pay rises these days, are still times for employees to think about what they’ve achieved in the last year and plan targets for the next 12 months. What about setting a higher target for saving in an employer scheme while they are in this reflective mood?
Finally, many employers have been forced by financial pressures to row back too far from their former paternalistic duties of looking after employees (and their families to a certain extent) right through into retirement. The number of corporate DB schemes closed or significantly under-funded testifies to that.
But for Auto-Enrolment to come anywhere near the former success of DB schemes, there is a need to redress the balance - charging HR departments and contracted employee benefits specialists alike, with the task of encouraging staff to save more than the statutory minimum amounts. Ideally employers should lead by example and make a point of giving more than is demanded of them.