AE initial success will stand or fall on the effectiveness of digital communications to stimulate member engagement and unlock admin efficiencies
28 September 2015
An extra £15bn a year will flow into workplace pension
schemes and some nine million savers will be brought
into pension saving for the first time by 2018 as a
result of Auto Enrolment (AE). Opt out rates so far are
much lower than originally anticipated back at the start
in in 2012. For younger workers, those under 30 for
example, opt out rates are much lower at just 7% and the
overall average is currently sitting at 12%.
But under 30s today are also unlikely to stay with one employer for more than four years, according to current employment trends. Indeed 25% of the UK population will have more than 15 jobs in their working lives and both these numbers are rising all the time. So given this fact why haven’t we been able to come up with a method of automatically moving AE pension savings pots with the person to the next employer?
It’s a puzzle which will have to become a priority for the Government just as soon as the bulk of employers have on-boarded their employees. The options to date are ‘pot follows member’ which suggests a system whereby pension saving pots under £10,000 in value are automatically ported to the next employer. The DWP apparently backed this in February and began work to bring it into being but has recently had to put it on ice due to departmental resource constraints.
Furthermore, pot follows member has not gained industry-wide support because of the costs involved in encashing and re-investing pension pots each time the enrolled employee moves. The Government’s own impact assessment states that these transfer costs could amount to £3.5bn over the next 35 years or £100m per year.
There are now in-depth arguments put forward by independent experts such as Henry Tapper which detail why pot follows member does not work without major modification. But the principal issue is the cost of encashment and the issue of asset ownership and management. Put simply, pensions are complicated and therefore transferring them is also complicated, costly and resource hungry. The fact that automatic transfers were going to be limited to those with pots of less than £10,000 only makes it worse as inevitably transfer costs will eat up a higher percentage of these members’ assets in an auto-consolidation scenario. Then there are the questions of different standards and different charging structures of providers which mean that pots being moved automatically may actually disadvantage members.
Other commentators, led by Tom McPhail of Hargreaves Landsdown, have proposed the alternative dubbed ‘one member one scheme’ approach giving each AE scheme holder a personal pot assigned to him or her which he will simply take with him (just like any other DC personal pension) as he moves between jobs.
The only snag is that these are AE pensions. The employee is signed up by the employer who makes compulsory contributions and administers employee contributions via payroll. It gets complicated when you look into the detail of doing this on a grand-scale. More than 10 million workers are estimated to be in the AE target group according to DWP by the time all employers have been included during 2017. Industrial strength systems and automation is needed. Tom McPhail tries to explain how ‘one member one scheme’ might work:
“Whenever you change jobs you can pick up the pension and take it with you and the new employer can pay into that scheme. This would bring a sense of continuity for the member and the default position should not be to keep moving money around."
However McPhail admits that a clearing house would need to be built for the approach to work as efficiently as possible:
"With one member one pot we would have employers paying into one key scheme but also lots of others," he said. "They don't want to have to set up lots of direct debits. To deal with this the money could be paid into a clearing house that would then organise where the contributions should be paid."
Right now no such clearing house exists and who is going to pay for administration around all this? It’s all a little unclear.
In the meantime, there is a pressing need to keep those that have been auto-enrolled engaged in their nascent pensions savings plans. Why is this necessary? Well ultimately they will need to be paying more than the statutory contributions if they are to live a comfortable retirement on the proceeds. As they get closer to retirement they will need to be thinking hard about asset selection and methods of decumulation now that they have so much more freedom and choice at-retirement.
Dunstan Thomas has been working on an innovative technology solution that combines multiple pension pots to improve consumer engagement, while reducing communication costs for providers using it. Take the fact that providers will need to generate and deliver an annual benefit statement for each and every AE pot (and that over time employees may have more than 10 AE scheme pots out there). These costs will rise exponentially if efficiencies aren’t found.
But the other key to making AE the long-term success it looks right now, is improving communication with members – giving them online tools to check out progress of their pots and drill down (by stages and in their own time and on any device) to investments and charges that are attached to these.
We are now living in the digital communications age and it is time for the pensions world to recognise that digital communications techniques can be applied to bridging the engagement divide while unlocking massive administrative efficiencies at the same time.
If we get this right there won’t be a need to automate processes to disempower members – they will be empowered by their own knowledge to take actions which put them in a better long-term financial position.
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