What have we learnt from auto-enrolment so far?

Significant longer-term challenges remain, however, as most DC pension pots are currently small.

Auto-enrolment has provided a boost to DC savings, but the current minimum savings level is only 2 per cent of salary between employer and employee. Auto-escalation of contributions is coming, but even at the top rate of 8 per cent of salary in total, most industry commentators would agree there is still some way to go. 

Communications need to simplify and demystify pensions and make use of all the media we have available

Generations X and Y are therefore increasingly likely to face a doubly tough message of, ‘You need to both work longer and save more than the statutory minimum levels.’

Why engagement is the biggest challenge

Against this backdrop, member engagement remains one of the biggest challenges facing the industry. There are a number of reasons for this. Research we have undertaken found that several behavioural biases undermine engagement with pensions:

• Heuristic bias: People tend to use mental shortcuts for decision-making and avoid choice. This is why so often they remain in default options. Although a well-run default fund may be a good option in the accumulation phase, in the world of freedom and choice, we need members to engage with their options at retirement, as it is much harder to make one size fit all for the over-50s.

• Present bias: People value today over tomorrow and tomorrow over next week, leading to a poor understanding of the distant future. As a result, pensions are often not a key financial focus – particularly for younger generations. Other products, like bank accounts and short-term savings, feel more real, current and relevant.

• Emotional avoidance: Inertia and procrastination dominate. Pensions are seen as complex, and so easier to ignore than consider.

• Overconfidence: People can lack realistic expectations of how much they need to live on in retirement and overestimate the amount of income they may receive. They assume everything will be okay – that the state pension will be in place and that they may be able to rely on other income sources, such as property.

If members are to increase their contribution levels and sustain these levels over the long term, the industry needs to address these barriers to engagement, especially for the over-50s.

Employer comms play a key role

Communications need to simplify and demystify pensions and make use of all the media we have available, so messages work just as well on a mobile as a laptop and can be delivered as videos or podcasts, rather than just paper.

For a start, our research showed that members are more likely to engage with communications from their employer than with their pension provider or the government. Employers can therefore play a key role in nudging and encouraging people to save more, either via communications or by holding educational sessions in the workplace. 

However, the responsibility cannot solely lie with employers. Pension providers, trustees and independent governance committees also have an important role to play – not just with engagement, but also in the design of appropriate and effective default solutions.

It is much harder to design defaults that will meet the needs of all workers as they get older and start thinking about how and when they will take their benefits.

We are likely to see many new solutions come to market that offer advice, flexibility, and maybe even a later life annuity to help meet the challenges of an auto-enrolled population in a world post-freedom and choice.

Emma Douglas is head of DC at Legal & General Investment Management