Employees want to put more money into long-term savings and can afford to do so, but need clear messages and active guidance, according to a report from Standard Life and University of Edinburgh.
The report, published a year ahead of the launch of automatic enrolment into pensions at work next year, says the Government must act to maximise the impact of the reforms with a co-ordinated campaign of financial education.
It says auto-enrolment could prompt an additional six million people to save, adding £12.5 billion annually to retirement savings by 2017. By extending the framework so that pension contributions rise automatically with pay rises, and employees can be enrolled into a workplace Isa, the impact could double to £25bn a year by 2025.
Although employees can opt out of auto-enrolment, the right communications could push opt-out rates as low as 18%, the report says. It found that almost a third of those who planned to stay enrolled were already willing to pay more than the basic 4% contribution rate, and also willing to increase contributions when they received pay rises. A significant 70% said they would find it “not difficult” to save an additional £50 a month if they had to.
The report, Keep on Nudging, developed by Standard Life with Professor Dr. Ed Hopkins and Dr Tatiana Kornienko, behavioural economists at The University of Edinburgh, sampled more than 600 employees nationwide, all earning between £18,000 and £45,000 – the so-called “squeezed middle”. It proposes auto-escalation of pension contributions by 0.5% in tandem with pay rises, and auto-enrolment into workplace Isas with a 2% contribution rate, and found only minor resistance to both ideas.
Among other recommendations the report says saving needs a clear national message, such as the “five a day” health campaign, and it calls for the word “pension” to be used only for the state pension.
David Nish, chief executive of Standard Life, commented: “The current economic climate presents many challenges. Yet our research found that the majority of people are still keen to prioritise saving, particularly when they are helped to understand what it means to them, both now and in the future.
“By presenting information about auto-enrolment that is clear and effective, which provides a clear picture of the value of employer contributions and the tax advantages, our research found that 82% of people would remain enrolled in their pension scheme. This is a hugely encouraging finding.”
Mr Nish went on: “This is just a first step however, and our report also highlights two potential extensions to auto-enrolment.
“I believe that, working together, employers, the long-term savings industry and Government can realise the full potential of auto-enrolment.”
More than four out of five employees would welcome advice on pensions in the workplace, according to research published yesterday by MetLife Assurance.
Tom McPhail, pensions expert at Hargreaves Lansdown which has so far set up almost 50 workplace Isas for firms, commented: “Standard Life is asking exactly the right questions: how do we encourage members to stay in pensions and to engage with retirement planning, and how do we build on the kick-start of auto-enrolment to ensure the whole project becomes a success?”
Mr McPhail said auto-escalation should “not be on the table” for the first five years, to allow the scheme to bed in.
Graeme Forbes, financial planner at Intelligent Capital in Glasgow, said he was concerned that low-cost tracker funds would become the default pension investment. “People will be enrolled into funds without advice, and they will be disappointed – that is the worry that the adviser community has.” He also doubted whether enrolment in Isas could ever be made automatic.
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