The United Kingdom has quietly undergone a pensions revolution over recent years. Prompted by a need to meet the combined challenges of an aging population and declining retirement savings rates, the government introduced a new policy based on behavioral economics. This policy reasserted the central role of the employer in UK pensions and put them back in the driving seat, helping turn around the United Kingdom’s pension saving behavior.
The United Kingdom’s new workplace pension policy goes with the grain of people’s natural inertia by changing their default savings status from “out” to “in.” Employers now have to enroll eligible workers into a qualifying scheme and contribute to their pension. Workers may opt out, but the evidence so far suggests that once the hard work has been done for them, most people stick with it. On average, less than 10 percent of workers have decided to opt out of saving, once enrolled. Younger people are even more likely to stay in.
The National Employment Savings Trust (NEST), a national workplace pension scheme, was set up by the government as a key part of the policy, with a public service obligation to accept any employer, no matter how big or small. NEST is serving a new generation of pension savers. Many of our members won’t have been in a workplace pension before, so we’ve been in a unique position from the start. Where much of the pension industry has existed for decades and has developed and adapted incrementally, NEST was able to start from scratch.
The workplace pension policy is now in its 4th year and around 6 million people, more than half of all who are eligible, have been enrolled into a pension as a result. But rollout has focused on the largest employers first and is not reaching the smallest. This figure represents only around 5 percent of all employers so far. The next couple of years will see 1.8 million of the smallest employers meet their duties and set up a pension scheme. While these employers have plenty of choice about which scheme to use, we’re confident that NEST has the right systems to cope with however much of that demand comes our way and to provide a scheme that meets our customers’ needs.
That’s because we’ve carried out extensive research and analysis into our members’ and employers’ wants, needs, and behavioral traits, and we designed the scheme around them. In fact, what we learned about the characteristics of our members at the start is particularly relevant to some of the smallest employers that are coming into NEST now. These are not big corporations with extensive human resources and employee benefits teams, they’re just ordinary people employing a nanny or a caregiver. They have similar responses and needs to the individuals they’re enrolling.
For example, when it comes to communicating with members about pensions, our research shows that they respond badly to being lectured on what they ought to be doing, or to being told scare stories about what will happen if they don’t save for retirement. That approach is more likely to paralyze them further than to spur them into action. The evidence from small employers suggests that they respond in very similar ways when told they have to set up a workplace pension. That’s why we’ve tailored our communications to small employers to give them positive, reassuring, and constructive messages.
When we looked further into what small employers are worried about, what they might need, and what they’re most likely to do to fulfill their duties, our findings were interesting.
Most small employers in the United Kingdom are new to workplace pensions. According to NEST insight 2015, before the new rules came into force, over 80 percent of small employers had no active pension scheme in place. Just like the average person, small employers can find pensions daunting. Research we carried out with consumers found that most people struggle to understand how pensions work, they’re baffled by a lot of the industry jargon, and many are even surprised to learn that their money is invested rather than just being “saved up.” Again, small employers with little previous experience of pensions are likely to have similar reactions.
However, we learned that employers are most worried about setting up and then maintaining the administration of the scheme. When we looked into the business processes required, we found there was an innovative yet straightforward solution. Payroll software, which most employers of all sizes use on a daily basis, held the answer. We’ve been working with payroll software providers to develop technology that can operate seamlessly with employers’ payroll systems. NEST’s functionality means any payroll provider can develop and offer software that exchanges crucial pension information with NEST. This takes the heavy lifting out of pensions and makes managing ongoing pension commitments as simple as clicking a button.
This, as well as our straightforward online systems, makes it easy for employers to get on and set up NEST themselves, even if they’ve never managed a pension scheme before. But we also found through research that a large number of small employers, about two-thirds—plan to outsource the work to a third party. Accountants, financial advisers, and other intermediaries are expecting to be called on to support employers through their workplace pension duties.
To enable these third parties to meet this demand, we’ve also developed a dedicated intermediary “hub” known as NEST Connect. This portal gives third parties their own identity on the NEST system and allows them to manage as much of the process as their clients want, from set up to full ongoing administration, for multiple client accounts.
Having started from the bottom up, we’ve been able to work out how to meet the challenges we faced while also putting customers’ needs front and center. Much of the innovation we’ve introduced may seem obvious now that it’s happened, but it was groundbreaking at the time. To handle millions of members’ pension pots through thousands of employer accounts, old paper-based systems and methods were simply not going to be viable. We pushed to make NEST online and self-service because we knew that not only would our customers expect it, but also there was no other way to scale up from zero to such high volumes in such a short space of time. Our payroll and third-party functionality may seem equally self-explanatory, and it is. But that’s the thing with innovation led by behavioral insights: afterward, you can’t imagine a world before it existed.
We’re pleased to see that it looks like the hard work’s paying off. Small employers setting up with NEST now are doing so as intended, without needing us to walk them through it. A recent survey of small employers using NEST found that a large majority (72 percent) say they expect to rarely or never need to call NEST in the future. For us, that suggests we’ve heard what they need and we’re giving them what they want. We’ll continue listening and learning in order to make sure we build on this foundation for the future. As needs change, we want to make sure we’re adapting and keeping up so that we can fulfill our mission to help millions of people enjoy a better retirement.
about the author
Helen Dean has been a leading player in delivering pension reform in the United Kingdom. She was appointed CEO of NEST in September 2015, having previously held the titles of executive director of product and marketing and managing director of scheme development there. Dean was a board director of NEST’s predecessor body, PADA.