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Automatic Enrolment and Pensions: a behavioural success story
Last week, the National Audit Office (the Government’s financial watchdog) published a report on a major government programme. If its subject had been a programme with a big overspend or a lengthy delay, it might have got a lot of attention.
But this report got next to no pick up in the media. Why? Because the programme it focuses on has been a remarkable success.
That programme is the automatic enrolment of employees into workplace pensions.
The idea is a text book example of applying behavioural insights to government policy. From October 2012, starting with the largest employers, the Government switched the default from one in which employees had to actively choose to sign up for a pension scheme (‘opt in’) to one in which they are automatically enrolled onto workplace pension schemes but can choose to opt-out if they so desire (‘opt-out’).
The behavioural research in this field has consistently shown that resetting the default from an opt-in to an opt-out scheme was likely to dramatically increase enrolment rates. One of the classic studies in the field showed pension participation rates rise from 49 to 86% for workers who had been automatically enrolled (Madrian and Shea, 2001).
A more recent study, by Raj Chetty and colleagues using a high quality data from Denmark, shows that it costs the Danish government roughly DKr 100 to raise household savings by DKr 1, using financial incentives (Chetty et al, 2013). Automatic enrolment, in other words, is highly cost effective relative to tax subsidies and other forms of financial incentives.
Despite the overwhelming body of academic research, the changes introduced in the UK were greeted with some scepticism in the British press. The changes were felt to be a burden on business, and many questioned whether or not they would be effective at all.
And that is why this report deserves more attention than it has so far received. Because the report shows that, if anything, automatic enrolment has been even more successful than was originally anticipated. For example:
- Opt-out rates have been lower than expected (between 8 and 14%, rather than the 28% the Department for Work and Pensions originally estimated).
- More people are projected to start saving or to save more than they were before (the Department has raised its estimates from 7 to 9 million people).
- Employer compliance is higher than expected so far (99% of employers expected to declare their compliance with the new duties have done so).
- The programme is costing less than expected (DWP has reduced its implementation costs by £100million, to £1billion).
Of course, there may still be challenges in the future, especially as the scheme is starting to cover the smallest employers, who are likely to pose new kinds of operational challenges.
But for now, it is worth shining a light on a government scheme that has over delivered on expectations and – most importantly – is helping millions more people to save for their retirement.
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