The rollout of automatic enrolment is into the final straight; however, there are already discussions around what happens next.
It has been hard work but, with over eight million pension savers newly enrolled in workplace schemes, the industry deserves congratulations. Yet the forward thinkers in our industry have already started asking: What happens next?
This was the focus of Aquila Heywood's second Breakfast Roundtable Series, with six DC pension providers. Coincidently, that same afternoon saw another very interesting event: 'The Great Retirement Debate', run by the Equity Release Council, looking this year at the challenge of dealing with 'vulnerable' people. Although a different focus, there was a common theme across both conferences: personalised insight-driven engagement is a priority!
The majority of people in workplace schemes are enrolled by default, make the default contribution and are placed in a default investment strategy without any real interaction and engagement. Yet, when these individuals reach the end of their working life, they are expected to make a complex decision on how to take their retirement income.
Employers and providers are very aware that the levels of standard contributions are too low to enable people to generate a reasonable retirement income. It becomes crucial, therefore, to educate and engage the workforce to increase pension savings, to enable staff to retire comfortably. There is a real risk that older workers will be stuck in employment well into old age, causing a 'log jam' to the detriment of younger staff.
Automatic increases to contribution rates are coming in 2018, which will start to address this problem; however, there is a significant attendant risk that, as contributions increase, opt-out rates also increase. Not only will this cause additional administration effort for providers, but it also challenges the commercial models, with asset growth reduced and costs increasing. Modern, efficient servicing platforms can help, but engagement is, again, a key mitigation. Persuading employees that increased contributions are an investment in a person's future and to stay in the scheme is going to be crucial to this next phase of automatic enrolment.
It is clear that high-quality engagement underpins future success for workplace savings. The challenges to be addressed demand engagement that is highly personalised to the needs of the individual. This is especially true for vulnerable individuals who lack the capability to make their own money-related decisions. The law demands that financial services practitioners apply appropriate due diligence and care in dealing with these people. In pensions that could relate to individuals of any age, but as people get older, the likelihood grows that they will fall into the 'vulnerable' category.
At our Breakfast Briefing it was evident that providers - both large and small - are not expecting to take a breather. The industry will need to stay active to deal with the challenges that lie ahead. A focus on insight-driven engagement strategies could be the catalyst for the behavioural change the market is trying to achieve.