With some of the largest companies auto-enrolling their staff into workplace pension schemes, the UK is having a first look at its latest policy manoeuvre. Philip Kleinfeld catches up with Joanne Segars, CEO of the National Association for Pension Funds, to see how things are panning out.
There's a revolution happening in the pensions industry and, according to the latest Scottish Widows Workplace Pension Report, 52% of us know nothing about it.
That's not particularly surprising. For all the talk of a "me culture" - the UK's population has a habit of neglecting a fairly fundamental part of its collective lives - the future.
The idea of automatic enrolment might not sound particularly revolutionary - the Department for Work and Pensions (DWP) communication agitprop certainly isn't - but the latest piece of pension policy has fairly radical ambitions to correct our long-standing inertia.
The theory behind auto-enrolment is based on the ideas of behavioural economists Richard Thaler and Cass Sunstein. They think that by nudging people into certain choices, we can achieve social and political goals without undermining individual freedom.
But, not everyone is convinced. Some people think auto-enrolment unfairly diagnoses the cause of our inertia as cultural when the decision not to save is, in many cases, a reflection of the position we find ourselves in - short of money and snared by debt. This is not irrational expedience or idleness. The benefits of future savings exist too far in advance to justify an immediate loss to an already mediocre, insecure income stream.
Of course, in the absence of systematic economic reform, something needs to be done to solve the so-called savings crisis. Only half the UK's workforce is saving enough for a pension, given the number of years they are living to. The average UK male lived to 68 in the '70s. Today, he lives to 80. That's 12 years of funding left to either the individual or the state.
Despite these figures, our expectations remain out of touch with reality. According to Scottish Widows' eighth annual pensions report, the average income people expect to receive at retirement is £24,500. Something around half that number is more likely.
Working longer is inevitable
Over the past two decades, the percentage of people working beyond the state pension age has doubled. As the state pension age rises, this trend is likely to stick.
Auto-enrolment tries to correct this situation by guiding us into saving more - influencing our actions without the baggage that accompanies acts of direct liberal paternalism. It's been a remarkable success so far - almost everyone that's been opted into their workplace pension has stayed in. Joanne Segars, CEO of the National Association for Pension Funds (NAPF) is unsurprisingly happy.
"To get that kind of result at a time when people are coming out of a recession, when many people haven't had a pay rise for years, when real wages are dropping, when people have lost faith in financial services, is a good result," she says. "But, the real test will come later this year when the medium and smaller-size businesses begin to go through the process. These are the companies with less internal resources that will, in many cases, be new to the pensions system."
Keeping people enrolled in their company pension scheme will be the next major challenge as auto-enrolment is introduced to small and medium-size businesses across the country. Existing data suggests "opt out" is well below what was initially expected - some of the bigger UK retailers have reported rates of only 3%.
"When we did some surveying last year, we thought a third of people might opt out," Segars says. "The DWP did some very similar polling that also suggested that a third of employees would opt out. What we're seeing now is much better."
Not everywhere is doing as well as Segars suggests. Coca-Cola has seen 12% of its workforce drop-out since introducing the scheme back in April 2013. And Standard Life has also reported a 12% opt-out rate for the companies enrolled in its master trust and group personal pension.
Getting people to understand the value of their pension would be one obvious way to minimise opt-out rates. Pensions are, after all, complicated financial products that most of us don't understand and can't engage with.
Achieving the goals
Again, it is unclear whether auto-enrolment will actually improve this situation. Some commentators like Henry Farrell have emphasised the possibility that nudge theory - alongside other top-down policy ideas - can debase dialogue by privileging technocratic solutions above democratic ones.
But, the two needn't be exclusive. Better information, more debate and greater public engagement will need to accompany auto-enrolment if its stated goal of getting people to save actually delivers. The DWP's language guide for automatic enrolment is a start.
Still, democratic politics can be a messy process. Most people accept that more needs to be done in terms of actual policy. In the US, the Save More Tomorrow campaign uses behavioural economics to influence the portion of earnings people use for their pension. Back in the UK - the NAPF are exploring ways of improving the pension process for people that have reached their retirement age.
Annuitising can be difficult to understand for ordinary people, and many don't get the right deal. Finding ways of applying nudge principles to the retirement stage, and making it easier for individuals and trustees to acquire brokerage services will be important if years of accumulated savings aren't eroded away by fees and charges.
"It would be easy to think things are done once auto-enrolment is ticked off the list," Segars says. "But really, it's just the start of a process. There are various things that create good outcomes - the amount of money put in, the number of years worked, and the fees and charges paid. We're spending all this effort trying to build people up so they have big enough pension pots - focusing on this accumulation phase - but when people go to retire, we let them go to the open market to sort it out themselves. That's not good enough."
Steve Webb, the UK's minister of state for pensions has recently announced "operation big fat pot", a system designed to tackle the problems that arise when people move from job to job. By having a single pot or a smaller number of pots to contend with, members will be liable for fewer fees and charges. It seems like a good idea but, as ever, other issues need to be considered.
"It seems, on the face of it, sensible," Segars says. "If you change your job, you should be able to take your pension with you. The problem is that there's no guarantee about where you're taking your pension to. And that's been at the heart of our concern. If you take your pension from a low-charging scheme to a high-charging scheme, and you do that time and time again over the 13 jobs you have, then you'll have a quarter of the value of your pension pot wiped out in charges. There's no guarantee about the quality of the scheme you're transferring to. People could find themselves in a much worse deal through no fault of their own."
Getting the point across
Putting these points to the government is part of what the NAPF is there to do. The group worked hard to simplify the regulations around auto-enrolment; achieving concessions on a number of points. But, politics and politicians can be tricky ground for the pensions industry. Though George Osborne has refused to cap the basic state pension, the timelines his government works to can conflict with the stated aims of pension funds and savers generally.
"One of the things that has frustrated us over the last three or four years is the fact that political time horizons have got shorter and shorter as we've been through the recession, and not come out as fast as expected," comments Segar. "On the one hand, we're being pushed by John Kay to support UK infrastructure with long-term investment in the real economy. But, on the other hand, we're seeing much shorter political decision making. If regulatory pressure is pushing us into guilt, that means we have less money to invest in equities in the real economy. It is the short-term nature of political decision-making that can be quite frustrating for pension funds.
If we've got liabilities that extend 40-50 years, then we need decisions that last."
Pension funds and the political establishment are united in their concerns about the UK's savings crisis. Whether or not automatic enrolment or any other application of nudge theory can resolve this problem remains to be seen. Cultural disengagement from pensions is a problem that needs solving, but the economic aspect of the savings gap shouldn't be de-emphasised. In many cases, people don't save because they haven't got the money - and no amount of technocratic fiddling is going to change that.