Government research into automatic enrolment has revealed that although it is likely to increase employee membership, both employers and employees have their doubts about the system.
Conducted by RS consulting, on behalf of the Department for Work and Pensions (DWP), the report looks at three different joining techniques used in occupational pension schemes with an employer contribution, amongst 13 companies from both the public and private sector.
The report, which is meant to be used as an indicator only, suggests automatic enrolment and active decisions systems are more effective at increasing membership and tackling inertia than Streamlined Joining, however, these findings are undermined by the problems highlighted by both employers and employees.
Entitled An evaluation of scheme joining techniques in workplace pension schemes with an employer contribution, the research used interviews with experts on pension developments, detailed case studies of both private and public sector employers and focus groups including IFAs to try and gain an insight into how the three different techniques worked within an organisation.
Figures from the report suggest automatic enrolment is the most effective method of increasing membership, although many of the IFAs questioned had more experience of Streamlined Joining and therefore their attitudes towards it were more positive claiming it simplified administration and controlled costs, while it also presented a less demanding and intimidating enrolment technique, which they felt was more conducive to increasing membership.
But this was not strongly supported by the research, with one of the case studies showing a company increasing their scheme membership by 12% after switching from a Streamlined Joining technique to automatic enrolment.
Sespite the possibility of increased membership, employers highlighted three main problems with automatic enrolment which either stopped them from adopting the system, or made them abandon it. They included fears that employees would react negatively to being enrolled in a scheme without their knowledge or consent along with expectations that the cost of employer contributions would rise to unsustainable levels, which would not be entirely offset by the slightly lower administrative costs. They were also wary about the risks of automatically enrolling employees who would not benefit from the scheme, either because they had alternative pension arrangements, or because they would not be with the company for very long.
Research conducted amongst employees across all three schemes showed they had their own reservations about joining a workplace scheme although most non-members said they had considered it. The main reasons for consciously deciding not to join, or to opt-out, were either that they had more pressing financial needs and couldn’t afford to save into a scheme, or that they were confused about pensions in general, which resulted in inertia. These barriers were found to have an affect on employees across all the companies, regardless of the enrolment technique used by the employer, which suggests it may not be how an employee joins a scheme that is the problem.
Rachel Vahey, pensions development manager at Scottish Equitable, commenting on the report says that it isn’t a big surprise that auto-enrolment performed better than the other two methods of joining, as it effectively makes inertia work in favour of the scheme. But she adds good communication is imperative if any of the techniques are to work in improving membership.
Vahey says: “Inertia and a lack of understanding are the biggest problems with employees not joining pension schemes, and the report demonstrates just how important good advice and clear communication is in helping employees to make a decision about their pension scheme.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]..IFAonline
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation