Workplace nudges: Good for both employers and employees?

By Dale Critchley, Policy Manager, Workplace Benefits

The success of auto-enrolment is tempered by the fact that a large proportion of those employers and employees who are new to workplace savings are choosing to pay in as little as possible.

While the auto-enrolment review will take a look at contribution levels, the question remains over whether the increase in contributions due in 2018 and 2019 will cause more people to opt out. A survey revealed that only 4% of our members say they will definitely opt out, but only 50% will definitely stay in. Inaction will likely impact these figures, but by how much?

Employers may choose to pay the minimum for a number of reasons. It could be a reflection of current economic uncertainty now magnified by Brexit, a change in the nature of employment or a lack of value placed on pensions by the employees themselves. That said, employees seem to be paying what they’re asked to pay – if that’s 1%, the majority are paying 1%. Whatever the reason, auto-enrolment appears to have strengthened the idea that minimum contributions are the right contributions.

Workplace nudges

Despite many employers and their advisers negotiating attractive terms for their workplace pension scheme, they and their employees still might not be getting full value from that investment. So what can employers do to improve outcomes?

Many employers offer higher contribution rates, and it’s common for an employer-matching structure to be implemented. This rewards employee engagement with a higher contribution, and in theory directs employer payments towards employees who‘ll value it the most.

Matching can be a powerful nudge to improve employee contribution rates when it’s effectively communicated, with evidence that almost 2/3 of members will choose the level that provides the maximum employer pay-in.

What can be done where there’s no employer contribution to nudge employees in the right direction? How can we convert spenders into savers? Initiatives such as Save More Tomorrow are probable long term solutions, turning good intentions into affirmative action, but simply reminding people that they can make one-off contributions could have a big impact. One-off contributions can help high earners take advantage of the current maximum government contribution, and bonus sacrifice offers even greater attractions through the NICS savings for both employers and employees.

Promoting the value of low charges can be really worthwhile for both employers and employees. Stakeholder charges were once revolutionary but now seem less relevant in a post-charge-cap world. A transfer has the potential to improve employee pensions significantly at little or no cost to the employer. An additional charge of 0.5% reduces the value of a 40-year-old’s £50,000 pension by nearly £7500 if they retire at the new state retirement age. £7500 seems a healthy return for the time it takes to assess if a transfer from a stakeholder friendly scheme makes sense or not.

The advantage for employers, in addition to the warm feeling that comes from doing the best for your employees, is that employees with bigger funds tend to be more engaged with pension saving, and value their company pension scheme more.

Long-term we need to increase pension contributions and employers will undoubtedly have a significant role to play, but in the short term employers could do worse than making sure their employees know the benefit of low charges, and how to maximise the positive impact of the pension savings they’ve already built up.

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