IOPS Committee Meetings and IOPS / OECD: Building better retirement: ensuring value for money, implementing automatic enrolment and designing retirement pay-outs
Chair, delegates, colleagues; many thanks for the invitation; I’m pleased to share The Pension Regulator's experience of rolling out automatic enrolment in the UK; a project of reform that has successfully reversed a long-term decline in pension savings.
More people now have an opportunity to save for retirement and though we still have a great deal more to do, the national situation is much improved. The reforms have been very successful; implementation relatively smooth and take-up has exceeded expectations.
These were not simple changes and though the benefits could be replicated globally, each of you will encounter your own challenges. I hope to provide you with some ideas upon which you might build and an overview of the strategies we used to reach this point.
Building better retirement
The theme of this seminar is ‘building better retirement’, and there is a clear need for our organisations to recognise that planning for growing and ageing populations is not only good for individuals, but for societies as a whole.
However local and specific our challenges, there is one thing that unites us; we are living longer. As a consequence governments and legislators are trying to secure financial futures; for us, our institutions, our businesses and their employees.
As practitioners it’s important we address these challenges and support financial stability. I’m pleased OECD have chosen to look at pension provision as part of their mission to promote policies that, in their own words; ‘improve the economic and social well-being of people around the world’.
I’d like to begin by setting our automatic enrolment programme in context, move on to current issues and conclude by touching on those issues that we predict might emerge in the future.
In the 1960s and 70s the UK had a successful pension system; with large employers in the private and public sectors providing high levels of coverage. ‘Defined Benefit’ pensions were conventional for full-time workers and people appreciated the need to plan ahead. However, the system didn’t cover those outside the workplace and in the 80s provision began to deteriorate due to a variety of reasons, including, of course increases in life expectancy and changes in the labour market.
Through the 90s and early 2000s successive UK governments tried to increase pension savings by introducing simpler products and focussing on financial education. Though ambitious, this approach didn’t have the desired impact, so in 2002 a cross party ‘Pensions Commission’ was created to look at the issue. It tried to understand why people were ‘under-saving’ for retirement and how to address it.
Their first findings were shared two years later in the so-called ‘Turner Report’, (named after the Chair of the Pensions Commission Adair Turner) which identified four problems; people weren’t saving enough for retirement and didn’t understand pensions, the system itself delivered unequal outcomes and increasing costs were unsustainable.
The report offered several choices you’ll be familiar with; people in the UK could work longer, save more, accept higher tax rates or be poorer, none of which were particularly appealing and all of which would have been difficult for any government to propose.
The Commission and its policy objectives were however supported by all political parties and there was consensus that something had to be done. It’s worth noting that political support was key to progressing this work. I believe it would be a major challenge to effect this level of change without it.
It’s vital to build political and social consensus when developing an approach like this; it creates authority, mitigates criticism and provides a platform for success.
A second report published in 2005 offered proposals for improvement; recommending a three-way approach; increase the state pension age, simplify the state pension and introduce a system of automatic enrolment.
So what happened?
Under automatic enrolment all employers, regardless of size must provide a pension and enrol all of their eligible workers. We define ‘eligible workers’ as people earning more than £10,000 a year, over the age of 22 and under the state pension age.
The legislation passed by Parliament set out that eventually, the employer and the individual will pay at least 8% of earnings. If the employer contributes 3% and the employee contributes 5%, 1% of that will effectively come from Government in the form of tax relief. This ratio was helpful in explaining the thinking behind the reforms and helping to sell the idea to the public. It made the financial sacrifice look and feel more shared.
Employees may opt out, it’s not compulsory; however every three years employers have to re-enrol workers who have opted out; creating a situation where employees are reminded of their options, but not pestered to engage. Encouragement rather than imposition.
How was this delivered?
The programme was delivered by three organisations; each with defined and accountable roles.
- Department for Work and Pensions: responsible for legislation and policy
- The Pensions Regulator: responsible for maximising compliance, education and compliance
- National Employment Savings Trust Corporation; a new workplace pension scheme set up by Government as a back stop, in case market providers chose not to engage
The scale of this operation has been huge. We recently celebrated the fact that one million employers are now in the scheme; over nine million employees have now been enrolled. This has increased the proportion of people in the UK saving with a pension from 55% in 2012 to more than 78% now.
With those numbers in mind it’s clear that for automatic enrolment to be successful, its implementation had to be carefully considered. Encouraging all employers to join simultaneously would have been a poor idea, so a phased approach was taken. We started with the largest, using their reach to set the tone for success. We felt they were most likely to comply because not doing so might harm their reputation.
Larger businesses employ a high number of the UK’s workforce, so working with them meant millions of workers benefitted quickly. This not only provided mass adoption, but had the added advantage of creating millions of mini-advocates – who could spread the word.
Implementation was initially phased over three years – beginning in 2012. However the original timeline was set before the financial crisis so was extended to allow smaller organisations more time as the economy adapted.
We also sought to phase in financial contribution levels, minimising impact for both employers and employees.
The number of employers enrolling staff increased significantly as the programme rolled out; hitting its peak in 2017 when many smaller employers adopted the scheme – many with less than five employees. Most of these employers were significantly less resourced than larger companies and so we had to change the way we supported and communicated with them.
Much thought was given as how best to communicate the idea of automatic enrolment. Working together with the Department of Work and Pensions we used behavioural science to inform our approach, creating a product based on the fact that people found finances and ‘the future’ difficult to comprehend. We discovered that because people found this hard, they tended to do nothing, so automatic enrolment was structured to exploit this ‘inertia’- people who did nothing automatically benefitted.
Creating a brand
Having created the product we needed to introduce it to as wide an audience as possible. An advertising campaign was deployed across all media to explain and ‘sell’ the idea of automatic enrolment. This featured a mascot figure – ‘Workie’, who had his critics, but whose uniqueness helped to make the campaign a success.
The value of creating ‘a brand’ has not been lost and communications about automatic enrolment are now aligned across relevant government departments. Messages continue to be broadcast; though they are now aimed at specific audiences; particularly distinguishing between employers and employees
The latest television campaign is once again a joint project between the Department of Work and Pensions and The Pensions Regulator. It is aimed at individuals and attempts to change their behaviour and perceptions in relation to pensions. A parallel radio campaign is aimed at employers, reminding them of their responsibilities.
We have found it helpful to be as specific as possible in both the message we wish to convey and the medium we use to deliver it – the sophistication of this approach has paid dividends in terms of uptake levels.
Happily the evidence shows that fewer than one in ten people have opted out of their pension scheme and employer compliance levels have been excellent. Our approach initially focused on Education, but we are now taking a firmer stance with employers who don’t comply. Our communications have also become tougher and more assertive, moving away from ‘educate and inform’ to ‘advise and enforce’.
Compliance and enforcement
To date we have issued almost 80,000 compliance notices, and pleasingly the vast majority of those have resulted in organisations quickly becoming compliant.
The fact that automatic enrolment is now the law has allowed us to use our powers to prosecute; there have been a number of instances recently where we have issued fines or sought legal redress for non-compliance. A number of household names have found themselves on the receiving end of our powers and we won’t shy away from pursuing organisations or individuals.
It’s one thing to devise and introduce a project like this; another to know it’s working.
The programme has been subject to many independent reviews, including the UK’s National Audit Office, The Institute of Fiscal Studies and the Government itself who committed to publish an evaluation of the effects of the reforms.
Their recent report ‘Maintaining the Momentum’ identified a series of issues including; the current levels of savings being made, challenges for the self-employed, costs for employers and oversight and understanding of pensions by savers themselves.
The government aspires to maintain the momentum achieved and has committed to reviewing levels of saving and increasing private pension provision. They also wish to make saving an everyday activity for young people and make automatic enrolment available to all eligible workers regardless of who their employer is, or the sector in which they work.
I’m proud of the achievements so far; they demonstrate that a clear vision, hard work and commitment can produce a genuine cultural shift. Though the collective consequences may not be felt for some years to come, we can be confident that people will be better informed and more aware of the need to consider adequately funding their retirement.
We need to think about the ‘financial adequacy’ of savings being made. Even with improved pension provision people are still not making adequate plans for retirement. The Pension Commission recommended an income in retirement of two thirds of a final wage and people are currently not saving anything like this kind of level, so having encouraged them to start saving, we now need to nudge them into considering what kind of retirement they want and will be able to fund.
Adequacy will be a hard issue to resolve and I expect debate among savers, employers and legislators as this becomes more broadly understood. I would like The Pensions Regulator to be a positive part of the conversation.
We also need to be mindful of issues beyond our remit like the global financial situation and responses to it: the fact that longer lives are not necessarily healthier ones and the role of markets in relation to a (potentially) better funded generation of retirees. Each of these has potential to impact on the sustained success of automatic enrolment.
As an organisation The Pensions Regulator is relatively young; just 13 years old. We have a wide – and growing – remit, which goes far beyond the automatic enrolment programme. Some of you may have seen there have been plenty of headlines and columns written about us recently. There are certainly high expectations placed on us. But we have a high quality team who have achieved significant results; of which automatic enrolment is certainly the most visible.
Our world is changing and it’s highly unlikely we are headed for a period of calm, but we can plan ahead and help others to do the same. I hope these comments on the UK’s experience of automatic enrolment will help you develop your own plans and I’d be pleased to hear your questions.
Non-Executive Chair of The Pensions Regulator