Give pension opt-outs 'lost contribution' statements, think-tank urges

29 January 2014

Employees who opt-out of workplace pensions should be given regular ‘statements’ of their lost employer contributions, tax-relief, and what their pension pot would have been worth - to encourage them to opt back in.

The proposal is one of several published alongside new research on what drives employees to reject workplace pension saving, even when employer contributions are available.

Who Saves for Retirement?’ analyses data from the biannual, government-funded UK Wealth and Assets Survey.

The research is being published by the Strategic Society Centre think-tank, in partnership with the Institute for Social and Economic Research (ISER) at the University of Essex, and made possible by Prudential.

‘Who Saves for Retirement?’ deploys sophisticated statistical modelling to measure the association that multiple factors have on whether workers save into their employer pension scheme.

The proposal for pension opt-out ‘statements’ comes in response to findings on the influence that attitudes to spending, consumption and ‘loss avoidance’ have on decisions to save into a workplace pension.

The analysis found non-savers were more likely than savers to say: they prefer to spend than save for the long term (50% compared to 42%); and, prefer a good standard of living today to saving for retirement (45% compared to 31%). Non-savers were also found to be measurably less financially patient than savers.

The government launched a major shake-up of UK workplace pension saving in October 2012, based on ensuring all employees have access to a decent workplace pension scheme with the offer of employer contributions, and automatically enrolling non-savers into their pension scheme.

The Department for Work and Pensions (DWP) has said that between October 2012 and October 2013, more than 1.9 million workers were automatically enrolled across nearly 3,000 employers. Among the first tranche of employers subject to the reforms, the DWP reports the average opt-out rate among workers automatically enrolled into a pension by their employer was around 9%.

James Lloyd, co-author and Director of the Strategic Society Centre, said:

“We have always known some workers would opt-out of their workplace pension after being automatically enrolled. The government now needs to develop additional measures for encouraging saving among workers who reject their employer scheme, even when employer contributions are available.

“Given the tendency toward ‘loss-avoidance’ among non-savers in our research, the government should ensure workers opting out of their employer pensions are given regular statements setting out the contributions they have missed out on, and what their accumulated pot would be worth.”

Tim Fassam, Head of UK Public Affairs, Prudential, said:

“Relying on the State alone will see many people retiring below the poverty line and shows the importance of building up a personal pension. Virtually everyone with the option of a company pension should take advantage of that, and the tax relief and employer contributions that go with it. When combined these often come to more than double the amount of pension contribution the employee has to make.

“Maintaining your standard of living in retirement means saving as much as possible as early as possible and joining a company pension scheme, where feasible, is for most people one of the best ways to secure an income in retirement. But that alone may not be sufficient to provide the retirement you want so think about talking to your employer or a financial adviser about other ways to top up your savings.”

Mark Bryan, co-author and Senior Research Fellow at the University of Essex, said:

“Even accounting for people's different financial and household circumstances, we found that a preference for living today over saving for the future was a strong predictor of their pension saving decisions. People less willing to delay the receipt of income were both more likely to leave a workplace pension and less likely to join one. The results emphasise that pension saving is not just about financial incentives but also about how the benefits of saving are perceived.”

CIPP comment

The CIPP fully supports any initiative to encourage employees to save for retirement, however the question has to be asked as to who would be responsible for creating and distributing these ‘regular statements’? Employers do not need any additional administrative burdens so could the pension provider provide the statements? There would still have to be some communication with the employer as the provider would not know if an employee was still with the same employer? If this initiative is realised, we hope that there will be full and thorough consultation on the detail, which the CIPP will of course ensure they are involved in.