Save More Tomorrow has been hugely successful in the US, yet, auto-enrolment aside, has barely made an impact in the UK. Behavioural finance guru Shlomo Benartzi tells Corporate Adviser some harsh truths as to why his strategy hasn’t caught on over here. John Greenwood reports
Getting workers to commit parts of future pay rises to pension contribution increases is an idea that has been around since before the turn of the millennium. In 2004, Richard H. Thaler and Shlomo Benartzi’s landmark paper, Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving, catapulted the idea of using nudges to boost contributions to a global audience of finance professionals.
In the US, take-up has been widespread, with the FT reporting its use in 2012 by 60 per cent of American companies. Yet while some UK innovators have been talking about Save More Tomorrow for over a decade, the strategy is yet to catch on amongst pension providers or schemes, apart from in its state-mandated form through auto-enrolment. For Benartzi, this is down to a number of factors – not least the inflexibility of our providers, UK politicians’ constant tinkering with legislation and plain inertia.
“Before the DWP and Pada were even thinking about auto enrolment, back in 2001, it was clear to me that our industry is not one that can innovate. You see it in the design of retirement plans, in the lack of digital individualisation. Pension providers are not doing what Amazon does in terms of personalisation. Everybody gets the same Nest pension statement, the same product,” says Benartzi.
Benartzi has even harsher words for those putting forward the argument that dealing with the technicalities of having to process people’s requests to cancel increases years down the line has proved enough of a burden to put Save More Tomorrow into the ‘too difficult’ box.
“If the administration of having somebody who has agreed to increase saying that they do not want to go ahead with it years later is too much of a problem then the people saying that should seriously call Amazon to run the business for them. If you are an asset accumulator and you are saying that this is too much work for you, you should quit your job. The idea people might say this illustrates the fact that new players could challenge the old fashioned players in this space.
“If you look at companies like Acorns in the US, you see that you can get new platforms to get millennials to save. They are getting millions of people on board and they are getting stickier as customers. As the gig economy grows we will find new mechanisms for people to save.”
It is obviously not true that the concept of Save More Tomorrow has bypassed the UK completely. Pensions auto-enrolment, which has its roots in Benartzi and Thaler’s behavioural insights, is arguably the biggest behavioural finance experiment in the world.
Benartzi says: “Not only are you doing it in the UK, you are doing it on a massive scale. If you think about the design of Nest and auto-enrolment, you have a series of escalations built into the process, as the contributions increase. So components of Save More Tomorrow, or the spirit of it, are already incorporated into automatic enrolment.”
“The second point is,” says Benartzi, “that because you have automatic enrolment, and the contributions are going up to 8 per cent, people have a false illusion that this will be enough to solve the problem. It will not.”
But that still does not explain why the UK industry hasn’t embraced Save More Tomorrow for the 8 million or so Britons already saving in occupational schemes, many of them at pitifully woeful levels.
Benartzi sees the UK’s annual Budget grandstand performance as another impediment to the development of advanced pensions product offerings, causing paralysis in the sector.
“Another factor you have to deal with is the UK political system. Once a year you guys in the pension industry get a large surprise. You get these massive surprises out of the blue, which you simply do not get in other countries. No other countries have anything like this to content with. So that means people in the UK feel they do not have the mental bandwidth to do a lot more,” says Benartzi.
“Also, in the United Kingdom, because the pension providers are smaller, they do not have as much budget to do this,” he adds.
He does not share the view that the US has seen more engagement with Save More Tomorrow because people feel more positively towards the product because they can, in certain circumstances, access their 401(k) pots. Indeed he sees the lack of liquidity as an attraction to pensions, from a behavioural perspective.
“I doubt that access is an issue. Half of people in the United States do not have access to their 401(k). Secondly, given the level of financial illiteracy in the United States, I suspect most people in the United States do not understand that they can have access to their 401(k). We have seen that the amount of access has been low, even in 2008 and 2009, so I would find it surprising that this difference between the US and UK would be a factor.
“If anything, the less liquid it is, the more attractive it is. People are willing to give up investment returns to have an account that is locked. People like this because it protects themselves from themselves. So greater liquidity can actually lead to less saving,” says Benartzi.
Benartzi also doesn’t buy into the idea that the UK’s regulatory framework, direct marketing rules or data protection regulations, might be what is holding providers back.
“I do not think that regulatory issues are an issue here. If there is a view that regulators will criticise people for trying to sell more pension, I do not buy that. The reverse will happen. Eventually people will be sued because they did not contact people and tell them that they needed to save more. At least in the United States, for sure this will happen,” he says.
“Don’t think of regulators as bad guys who don’t allow you to do anything. Think of them as collaborators. I can’t see why if you asked for an opinion letter, as we say in the United States, saying that I’m intending to sell more pension, that you would not get some type of support from the regulator.”
Speaking to Benartzi it is clear he sees the UK caught in a combination of paralysis and inertia, a situation that he saw in the US too years back. “Inertia was a key factor in the US, says Benartzi. “We found it was very difficult to do Save More Tomorrow at first – getting the first record keeper to do it was tough. It was Vanguard – to get them on board was difficult. Then everybody wanted to get involved. So it is a combination of all these things.”
Maybe the UK will follow a similar path if one provider breaks the logjam.
Save More Tomorrow – UK perspectives
Aegon pension director Stephen Cameron says: “The UK has been focused on automatic enrolment, which has been a big behavioural experiment. But that doesn’t explain why with millions of other people contributing to schemes at the full level, but still below a level needed to deliver them sufficient income in retirement haven’t taken this idea further.”
Scottish Widows head of policy development Peter Glancy says: “We looked at this in detail about 10 years ago. We found that the challenges were more about processes and systems. To get Save More Tomorrow to work relied on engagement, but back then nobody wanted to be engaged with their pensions. What is different now is that we have automatic enrolment. If we get through the step-up in contributions to 8 per cent then we may have a change of mindset. Innovations in communication may also help us to close that engagement gap.”