In this guest blog, Cynthia Pagliaro, Senior Research Analyst at Vanguard, shares her key takeaways from How the UK Saves 2019 and reflects on what other countries can learn from the UK’s experience of auto enrolment so far:
In partnership with Nest Insight, we recently published the second annual edition of How the UK Saves (PDF). The publication highlights the member experience for nearly 8 million Nest members across 800,000 employers in the year to March 31, 2019. This report, the largest empirical study of retirement savings in the UK, provides useful insights on the efficacy of the auto enrolment mandate.
Some key report highlights
Since January 2018, Nest’s membership across both employers and workers grew considerably; 20% and 28% respectively. 99% of employers who used Nest had fewer than 50 employees. This demographic highlights Nest as a tool of universal availability and usage, especially useful to small and mid-size employers to discharge their auto enrolment duties. While smaller employers dominate, over one third of members worked for mid-size and large firms.
Nest’s membership spans many industries and geographical areas across the UK. Demographically, Nest’s membership skewed a bit toward younger workers on low-to-moderate incomes. A typical active Nest member was 38 years old and earning close to £19,000 per year.
Over 92% of all Nest members had been automatically enrolled. The remaining 8%, representing over 250,000 people, actively chose to join Nest, with half earning less than the auto enrolment minimum of £10,000.
Ongoing enrolment opt-out rates remained low, at around 7%, despite the increase in the contribution rate to 5%. Beneath this headline rate, though, some groups are more likely to opt out than others. For instance, a worker who’s previously stopped contributing, then been re-enrolled as part of their employer’s duty to re-enrol workers every three years, is more likely to opt out. Overall, though, the impact of these re-enrolment rules is encouraging. Every one of these re-enrolled workers had previously chosen to stop contributing, yet when they were enrolled for a second time, four in ten chose to keep up contributions.
Annual contributions as well as account balances increased considerably as a result of the first phasing increase. On average, annual member contributions increased 128% from £219 to £499. Higher contribution rates led to significant account increases. On average, member account balances increased from an average of £446 to £760. In next year’s edition, we will almost certainly observe more profound changes at the 8% contribution level.
Nest members are automatically defaulted into an age-appropriate retirement fund. 98% of members remained in these funds, enjoying a five-year annualised return of 9.5%, well above fund benchmarks. Consistent with a default scheme design, very few members switched funds, though activity was slightly higher than the prior year.
About one quarter of Nest members were web registered to interact with their accounts online. Nearly half chose to interact via a mobile or tablet devices. In the US, we see interactions increase with account balances, so it will be interesting to observe if this behaviour occurs in the UK as well.
Observations from across the pond
In preparing this report with my colleagues and partners, I was struck by a couple of important observations. First, mandates most definitely improve coverage. Typical ‘at risk’ workers, including younger, lower income and more transient workers, are now able to save for retirement. Of the 8 million Nest members, a significant portion would otherwise be unlikely to save for retirement. Coverage is a big challenge in the US, as only half of US workers have access to a workplace scheme. The UK is certainly an important reference of a system designed to enable all workers to save for retirement.
Second, people are people and their behaviour is not always culturally dependent. Whether in the US or UK, inertia is a powerful force, so default schemes are highly effective. Most people also lack the skill or desire to select their own investments. Many are overwhelmed with making such a critical choice and with managing investments over time. Nearly all Nest members remain enrolled in their workplace schemes and invest in retirement-date funds. Among schemes that use auto enrolment in the US, opt out rates are also very low, and many workers continue with defaults, leaving contribution rates and investment selection unchanged.
In addition to providing important insights to providers and policy makers in the UK, the findings of this report can provide important insights to other countries seeking to improve retirement security across their respective populations, particularly among younger and low-to-moderate income workers.
Cynthia Pagliaro, Senior Research Analyst at Vanguard
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Vanguard Asset Management, Limited is authorised and regulated in the UK by the Financial Conduct Authority.