Making pensions mainstream: what do we know about the new generation of savers?

We recently published research with the Institute for Policy Research at the University of Bath, looking at the context in which the UK’s radical overhaul of pensions policy was able to take place between 1997 and 2015. As that research lays out, at a headline level the UK pension reforms have been an extraordinary success, dramatically increasing participation to more than 80 per cent of UK workers who are eligible for auto enrolment, up from around 50 per cent in 2012.

As a result, auto enrolment has brought a more diverse audience into the pensions market that’s more representative of mainstream society. An interesting question that flows on from this is: What more do we know about these new savers, in terms of their reactions to auto enrolment, and their needs and expectations from the pensions system? And, what did that mean back when we were first launching Nest in terms of how we should communicate with them as new members of the scheme? These were the topics that a former colleague, Ranila Ravi-Burslem, and I tackled in the chapter ‘Communicating Nest Pensions for “new” DC savers in the United Kingdom’, written for a book recently published by The World Bank.

In the chapter we discuss the evidence on which Nest based its early member communications approach. This included drawing on behavioural economics to identify the specific barriers people face in starting to save for retirement, such as present bias, procrastination, loss aversion and the paradox of excess choice. We also set out the specific characteristics of the Nest target market that set them aside from the broader working population and, especially, from those traditionally more likely to be saving for retirement. Our members were generally younger, on lower incomes and, while highly confident and competent with respect to short-term money management, they were often lacking in confidence when it came to longer-term financial planning. Three-quarters (74 per cent) said they were confident handling day-to-day financial decisions, but only 39 per cent said they were confident handling long-term decisions. Many had little if any familiarity with concepts relating to investment. They tended to lack a sense of self-efficacy, were fearful of pensions and of the possibility of error, and were highly risk and loss-averse. At the outset of Nest, this naturally led to concerns that the opt-out rate could be higher than we might ultimately want.

From this evidence base we set out how Nest developed its communications approach in the early years of operation. Paramount to this was the need to maintain simplicity, build trust and to reassure – far more so than any focus on building ‘capability’ or seeking to prompt a lot of early engagement or active decision-making, where the evidence suggests previous efforts have had mixed results.

Our approach to communications therefore concentrated on identifying the best ways to explain unfamiliar concepts and bolster confidence in the path down which savers were being defaulted. One area of focus was on the language traditionally used to describe pensions. This included a set of ‘golden rules’ for communicating – such as ‘keeping it real’ by making information as practical as possible, and ‘out with the old’ focusing instead on people’s present situation, not some abstract view of the future. We also started again on the vocabulary of pensions and, following an extensive program of market research, began to build up a dictionary of approved words and phrases, getting rid of technical terminology such as ‘decumulation’ and talking in everyday language such as ‘accessing retirement income’.

Of course, we know that for a lot of people, sticking to the default settings of auto enrolment will not be enough to get them the income in retirement that they might want or need, and people also face complex choices about how best to access their savings, following the ‘freedom and choice’ reforms. The approach we discuss in the article was very much the ‘version one’ of Nest’s communication with members. As we move beyond the final phased increase in minimum contributions, and into the ‘steady state’ of the pension reforms, we will need to turn our attention to building a more proactive and engaged relationship with members. Much of Nest Insight’s research programme is driven by this need. However, that ‘version one’ approach contributed to the low opt-out and cessation rates which, in turn, have helped make the reforms such a huge success overall. That success gives us the platform to build on in addressing the remaining challenges that savers face.

Will Sandbrook, Executive Director of Nest Insight