Opt out, pay later: showing employees what they're really giving up

Around 10% of employees opt out of their workplace pensions. This means millions of workers are losing out on employer contributions and a better financial future.

The Pensions Commission is about to release its interim report on pensions adequacy, a topic most in the industry agree should be top of the agenda. The obvious, logical solution is higher contributions. But what about the millions who aren’t saving at all?

It’s not just the self-employed who are at risk of reaching retirement with no pension. The hidden story is employees who opt out of workplace pensions. Around 10% may seem small, but that still means millions of employees walking away from their future security.

According to official figures, fewer than five in ten people saved into a workplace pension in 2012. Fast forward to 2024 – the Office of National Statistics’ most recent data – and nine out of ten people were doing so. Such has been the benefit of auto-enrolment.

But if we want to get as close to 100% uptake as realistically possible, I think it's time to ask ourselves some hard questions:

Why do people really opt out of their workplace pensions in the first place?
Are we sure they have all the facts they need to make an informed choice?

Who opts out of auto-enrolment?

The people most likely to opt out of auto-enrolment are younger workers, lower earners, and people who work variable hours and whose income therefore fluctuates: those on zero-hours contracts, gig-economy workers, and casual workers.

These workers are often struggling with student debt and the high cost of living. Milestones their parents took for granted, like getting on the property ladder, feel increasingly out of reach. As a result, they tend to prioritise having more take-home pay now over a savings pot for later life.

Like inertia, this line of reasoning has powerful psychological roots.

Upcoming bills are urgent, while retirement is an abstract concept. So, having an extra £50 in your pay cheque now feels more important than being better off in 30 to 40 years’ time.

More carrot, less stick: overcoming loss aversion

I'm old enough to remember a time when pensions weren't referred to as 'retirement savings', but as 'deferred pay'. I think this is absolutely the right way to look at it.

For one, it's a much more technically accurate description: you're not forgoing a part of today's salary but postponing taking some of it to have more money tomorrow.

But, equally – if not more importantly – it creates an opportunity to highlight a feature of auto-enrolment that many of those who opt out may not be giving enough consideration to: the employer also contributes to the pension.

In practice, this means opting out of auto-enrolment has the same impact as choosing to take a pay cut. The worker loses more in the long term than the amount they gain in the short term.

This isn't an abstract argument. The maths backs it up. Assuming you meet the minimum salary threshold, the employer must contribute 3% to your retirement pot. On a salary of £23,000 a year, this is an extra £690 a year. And that's before you factor in tax relief and growth.

Having this information to hand at the point of decision may not stop people from opting out of auto-enrolment. Nor is that the goal. Rather, the goal is to make sure that, when people decide to opt out, they do so with their eyes wide open.

Simple intervention with significant potential

Behavioural psychologists Kahneman and Tversky famously said: "Losses loom larger than gains."

If we accept that this framing plays a key role in many workers' decision to opt out of auto-enrolment, I think it follows that the only way to persuade them otherwise is to show them that the opposite is true. Opting out of a pension, not saving into one, is the loss.

A powerful way to reframe this is to offer employees personalised financial statements showing them what they'd be giving up, at the moment they opt out.

This isn't a radical concept, by any stretch. Schemes already provide generic warnings that opting out could mean losing out.

What I'm arguing for is that we need to go beyond generic compliance messaging and provide tailor-made information. Information that enables every person to make the decisions that are right for them at the right time.

Because decisions around retirement saving, particularly in the context of individuals' financial situations, shouldn't be shaped by psychological triggers or 'traps', but by a support structure that gives them more freedom to choose.

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