Automation is just the beginning, engagement is vital

This is very good news as the success of the policy could have a large impact on Britain’s long-term economy and is perhaps proof that this form of automation can be successful.

Figures recently released by the department for work and pensions showed that, prior to the introduction of auto-enrolment, where a company had a scheme which required the individual to opt-in the take-up rate was 36 per cent whereas companies with schemes which required an opt-out had a take-up rate of 90 per cent. Of course there may be other factors involved such as scheme design, employer contribution levels and eligibility but it seems likely that automation is at least a part of the success story.

Increased consumer engagement with pensions is something that has been seen as an important issue for many years. It is an issue that, unfortunately, has not been resolved. Some may argue that auto-enrolment is a direct result of the industry’s failure to engage consumers and this may be true.

However, I do not believe that this means the need to engage has become any less important or is something which should be given up because an easier alternative has come along. In my opinion auto-enrolment gives us an increased opportunity to engage people, an opportunity unlike any we have previously had.

It seems to make sense that once people have started to save in a pension the industry and policy makers have a perfect opportunity to boost their engagement with retirement saving. The initial hurdle has been overcome, they have a pension, and with well thought out communication we can start to encourage them to take an active role in their retirement planning.

However there is a danger that the success of auto-enrolment could encourage us down a different path. If it becomes clear that automation can be relied on to achieve quick results it could easily become the standard response to any issue.

Member engagement is, in my view, vital. Auto-enrolment is a step towards a solution to the problem of a lack of retirement provision but it is not the full solution.

For example, it is generally accepted that the current auto-enrolment minima are too low to achieve the retirement income most people desire; indeed there is some evidence from the US, which suggests that some people actually save less under auto-enrolment regimes because they default to the minimum levels. Without engagement it is difficult to have the discussions, or impart the information, which will see people saving at suitable levels.

Increasing minimum auto-enrolment amounts is an option but the recent opt-out figures produced by the DWP showed that where higher employee contributions were required the number of opt-outs increased. Simply increasing these amounts without engaging members to ensure that they understand the long-term value is likely to put people off saving rather than encouraging them.

Auto-enrolment is definitely an excellent first step. Overcoming the barriers that prevent people from considering their need for retirement savings is vital but at its core the use of automation is designed to remove the need for member engagement. The more automation there is the less need the member has to engage, the less engagement there is the more the need for automation. It becomes a vicious circle encouraging the perception among scheme members that, no matter what the issue, someone else will deal with it.

Retirement planning is not as complex as people often fear but it is an issue where a person’s individual, and perhaps unique, combination of goals, needs, attitude to risk and other circumstances are important. In short it is an area where getting the individual engaged in their retirement planning should benefit everyone.

Peter Cottingham is head of policy development at Prudential

Key points

Auto-enrolment has an excellent chance of overcoming the initial inertia that prevents people from saving in a pension

Increased consumer engagement with pensions is something that has been an important issue for many years.

Increasing minimum auto-enrolment contributions is an option but recent opt-out figures show that where higher employee contributions were required the number of opt-outs increased