The behavioural problem with the retirement savings gap

The pensions industry has spent decades trying to solve the wrong problem.

The Pensions Commission's interim report published on 19 May highlighted that around 15 million people are currently not saving enough for retirement. Automatic enrolment has been a huge success in getting people into pensions, but it has not solved the adequacy problem.

For decades, the pensions and employee benefits industry has struggled to create meaningful behavioural change when it comes to employees paying more into their pensions. It got so bad the government had to step in with automatic enrolment.

Before automatic enrolment, around a third of employees were not members of their workplace pension scheme and the vast majority of those who were members simply paid the minimum required contribution. Automatic enrolment largely fixed the membership problem as opt-out rates have been relatively low and millions more people are now saving for retirement.

Contribution levels are too low

Unfortunately, it has also created a false sense of security.

In reality, being enrolled in a pension and being on track for retirement are two very different things. This is amplified if you are in your 30s or older and only started saving when auto-enrolment began.

More than a decade later, contribution levels remain far too low for many people, especially those who are aged 40 and older. Despite countless communication campaigns, webinars, apps, dashboards, modelling tools, and engagement initiatives, very little has changed.

This is because most pension communication focuses on products, investments, tax and technical information. Employees don't need more information. They need a reason.

After more than 30 years helping tens of thousands of employees improve their financial future, I have come to the conclusion that there are really only two things that make a significant difference:

start saving early
save enough each month to achieve your retirement goals.

The government has pretty much solved the first problem through automatic enrolment. The second remains unsolved.

Compelling reasons

What if the problem isn't that employees don't understand pensions? What if the problem is that we've spent decades talking about pensions instead of giving people a compelling reason to save more?

The irony is that increasing pension contributions doesn't just benefit employees. It creates significant benefits for employers too.

Let's start with the obvious one: Employees are more likely to achieve the retirement they actually want.

Beyond that, the benefits become even more interesting:

Employers using salary sacrifice will typically generate additional National Insurance savings as employee contributions increase. In most cases, those savings can offset the cost of the engagement activities required to drive higher pension contributions.
Engagement with the pension scheme improves dramatically because employees begin to see a direct connection between the actions they take today and the future they want tomorrow.
Employees are also more likely to view their employer positively. Organisations that actively help employees build financial security demonstrate that they genuinely care about their people rather than simply providing benefits and hoping for the best.
There is also the future workforce planning benefit.
Employees who build meaningful pension savings are more likely to have choices later in life. They can retire when they want to rather than when financial necessity dictates.
The connection between retirement planning and financial resilience. When people have a clear long term goal and a realistic plan to achieve it, they tend to feel more in control of their finances overall.
Financial confidence extends beyond pensions as employees become more interested in saving, investing, building emergency funds and improving their overall financial position.
As pension pots grow, employees become more engaged with their finances generally. They are more likely to seek guidance, take advice, ask questions and make better financial decisions across multiple areas of their lives - the result is greater financial resilience.

The challenge ahead

Financially resilient employees tend to experience less financial stress, are often more productive and are less distracted by money worries. They are also more likely to stay with their employer, rather than looking elsewhere for a higher salary simply because their finances are under strain.

This is where pensions become a business issue.

The challenge is helping employees develop a meaningful retirement goal and motivating them to take action. That is where most pension strategies fail.

They fail because they focus on pensions when they should be focusing on people.

The pensions industry has spent years debating charges, investments, technology, dashboards and communication strategies, but 15 million people are still under saving for retirement.

Maybe it's time we stopped asking how to explain pensions better and started asking how to motivate people to take action?

Until the industry recognises that the retirement savings gap is a behavioural issue, it will continue to achieve the same results it has for the last 20 years.