Tom Hibbard

Has the key to the UK’s retirement savings challenge been in front of us for the last decade? An insight into behavioural economics may prove both informative and significant.

Auto-enrolment is now well under way in the UK with just over 6.3 million DC savers as of The Pensions Regulator’s June report, compared with just 2.9m in 2012 before Auto-enrolment had begun.

We can all agree that Auto-enrolment is an effective means of getting people to start saving sooner, but how much is enough when scientists are already predicting some of us alive today will reach 150 years old? This may seem extremely high given life expectancy in this country is still currently under 80, but when you consider that the oldest UK resident died at 113 recently and the oldest still living is 112, is it that inconceivable? Given that the majority of employees in workplace pensions contribute the legal minimum, this will still leave them without sufficient income at retirement (I will deliberately steer clear of what “sufficient income” is defined as!). In 2018, the government, as part of the Auto-enrolment process, will increase employees’ contributions to 5% in some cases. As a result, many people already finding 1% to be a burden on their take-home pay will likely opt out when these increases come into effect. The Treasury are already predicting that 15% of people will have opted out before Auto-escalation even begins.

Is ‘Save More Tomorrow’ or ‘SMaRT’ the answer? This proposal, developed over a decade ago in 2004 by two American behavioural economists, Richard Thaler and Shlomo Benartzi, outlines how employees are more likely to respond to contribution increases using well-designed “choice architecture” – the way in which the increase is presented to you. This plan was constructed around five psychological principles that we see in everyday human behaviour.

• Guilt: many people feel they should be saving more, even plan to, but never do;
• Self-control restrictions: it is easier to implement things if they take place in the future;
• Loss aversion: people hate seeing their pay cheques go down;
• Money illusion: losses are felt in nominal amounts;
• Inertia: going with the flow.Save More Tomorrow works by synchronising increased contributions with pay rises to ensure that the employee never takes home less money in the future. The key to implementation, however, is timing. Given the current rollout of Auto-enrolment until 2018, attempts to implement this kind of plan could overcomplicate things and place too much of a burden on employers. Pay rises have also been somewhat rare since the crash as real wages are 10% below their ’07 peak causing further issues.It is, however, something that in the future could not only encourage higher rates of savings amongst those still enrolled in 2018, but also encourage those that originally opted out to reconsider a more attractive savings plan and build a better future for themselves.