Hayley James is a PhD student at University of Manchester with sponsorship from the Pensions Policy Institute. Her Thesis looks at the impact of automatic enrolment into workplace pensions on individual decision making, based on a qualitative research methodology. Hayley has a background in Economic Anthropology. Her main research interests concern sociological and anthropological perspectives on money and value, and how meaning is created through these tools.
Hello, I’m Nigel Warburton and joining me today is Hayley James, a Pensions Policy Institute and ESRC sponsored PhD student in the department of Global Health and Social Medicine at Kings College London. Hayley, we’re going to talk about pensions and auto-enrolment. What do we mean by auto-enrolment here?
Auto-enrolment is a policy that was implemented by the government and it basically means that employers are obligated to automatically enrol their workers into a workplace pensions scheme.
Why was that bought in?
The main reason was that people weren’t saving enough, so throughout the 80s and 90s this was reducing both in terms of the number of people saving and the amount of money they were contributing. It got to a point where the government realised there was going to be a challenge around the provision of incomes for retirement age.
So the government was highly motivated to come up with a solution that allowed people to save enough to live comfortably in old age. But auto-enrolment doesn’t give them a choice, they are just automatically enrolled?
So I think the thing about auto-enrolment, it wasn’t just about allowing them to save, but encouraging people to save. People have always been allowed to save what they wanted, so this was about nudging them into actually doing the saving.
Nudge is this term particularly associated with Richard Thaler and Cass Sustein which says that people aren’t rational in the decisions they make for themselves and are often led astray by things that are irrelevant, so structure the world so that they don’t make those sorts of reasoning errors and they will end up in the right place.
Yeh, so it’s about encouraging them to make the right decision. The nudge theory says that people are fundamentally rational but flawed in terms of how we process the choices available to us, so by offering choices in a certain format say we can encourage them to make the right decision, hence ‘nudge’ them into the right decision. So that’s what auto-enrolment was about, people weren’t making the right decision in terms of saving for their pension, so it was about offering them the choice in a way that meant they were more likely to take up that choice.
What’s interesting here is that the nudge is a compulsory push, it’s not a nudge in the right direction it’s a forceable shove.
Yeh, so I guess you could say the terms of nudge have changed slightly because it is obligatory. You do have an option to opt out, so if you are an employee who has been auto-enrolled you can opt out at any point from the pension scheme. But it kind of relies on that when it comes to making decisions, people are quite inert, so there’s a theory of inertia which says that people are more inclined to do nothing than to do something. Once you’re auto-enrolled in your auto-enrolled in, you are less likely to opt out that you would be if you were asked to opt-in in the first place.
Similar logic has been used in relation to organ donation, if you make the assumption that everybody, if they don’t opt out, is prepared to donate their organs in the result of an accident or something, then you get more organ donation. If you make it so they have to opt in, people have to make an effort and you get fewer organs, so better to structure society on an opt-out version.
Lots of studies have shown how good it’s been in terms of getting people into things like organ donation. I think it has used in some health measures as well, where you don’t opt in but you can opt out. The difficult thing with pensions is that it’s not just about the one-off decision. With organ donation, once you’re in you’re in the system and that’s done. With auto-enrolment into pensions you get in, but it’s not enough to just be in the pension system.
If you are auto-enrolled you are at a minimum level of contribution which is 8% and over the course of your lifetime that is not enough to provide for an adequate pension when you get to retirement age. That minimum contribution is made up of the employer and employee contribution, that’s the minimal level but if you just retire on that, no it’s not going to be an adequate retirement.
So that nudge wouldn’t save you?
It wouldn’t get you very far… I mean something is better than nothing, right? So if you save all your life at 8% you’ll still have something to retire on, but it won’t be a very sufficient amount then.
So what is the government expecting to happen, what’s the assumption that is being made about this nudge, because they must have seen that the numbers don’t add up
I think there’s an assumption that once people start saving, they will start to see the benefit of pension saving, so you know, by being in the system, being a participant, you start to receive more information and you see that contributing a few percent from your salary is not so bad, so you start to become a lot more engaged with the process. There’s still this kind of idea that once you’re in, you will see the rational benefit of saving and continue with it.
So there’s almost a contradiction, you’re saying that people aren’t rational, and they need to be shoved in the right direction with the auto-enrolment, but once they are auto-enrolled, they become rational and see that it’s good for them, and make a huge donation and have a very substantial pension.
So I know that the government has spoken about things like the culture of saving, that with auto-enrolment we are developing a culture of saving, but I feel there is still this discrepancy between this you know, people are irrational and need a push, versus once you’re in you need to keep saving anyway.
I guess there’s an empirical question whether or not people will increase their pension contributions, given that it’s a relatively new policy.
So in the UK there’s not much evidence yet. The initial findings from auto-enrolment in the UK is that participants has increased but most of them are making contributions at the minimum level so average savings has actually come down since the introduction of auto-enrolment. There are other countries, so the US for example, they don’t have it at a national level but individual companies are able to implement it into 401k plans, which are like a pension scheme. And some of the evidence there shows that auto-enrolment anchors people to a lower level of saving, so people end up saving less overall than they would have if auto-enrolment hadn’t been there to start with.
I can see that, because there’s a kind of learned helplessness there, if someone takes over your pension plan, you don’t have to think about it, you don’t have to worry about it because someone is taking your contribution out without you being involved in the process.
Yeh I think that’s the danger of auto-enrolment that people think, oh I’ve done it now, I’ve been told what to do and I’m doing it, I don’t need to do anymore.
Now you’re studying this as a sociologist, you’re not devising pension plans, could you say a bit about how a sociologist studies a question like this, studying pensions?
I think what’s interesting is how people make decisions about their pensions. The focus on auto-enrolment has taken away the question of what are people’s motivations for pension saving, because we’ve just started assuming that everyone is rational but flawed and need this nudge. So what I’m trying to do is move past that and look at what are people’s motivations or reasons for contributing to their pension, so that could be as varied as how do people think about the future, how do people think about growing old, down to money practices and how do people manage their day-to-day spending as they are making contributions and having to pay for a lot of other things as well.
Presumably, that changes over time as well, so if you ask an 18 year old and they will laugh at you because they are not even starting to think about old age, and you ask a 50 year old who will start to be worried about it.
I think at different stages of life there are different meanings in pensions for people, so the closer you get to a pension the more meaningful or important it is to you.
And the less opportunity you have to make a big impact, because pensions rely on small contributions made over a long period of time, it is very difficult in middle age to generate enough contributions to have a big pension.
Yeh exactly that’s exactly the kind of contradiction. I think by better understanding people’s reasons or motivations for saving into a pension, we have a better chance of encouraging people in their 20s to save into a pension which seems so foreign and far away.
And what’s your methodology? What are you going to do? What’s your plan?
It’s a study based around interviews with people who have been through the auto-enrolment process using a case study approach, so people who have all been through the process in one place. I’m talking to people who have either stayed in the scheme and stayed at the minimum levels, people who have stayed in the scheme and increased their contributions, and people who have opted out of the scheme to understand a bit more about the motivations that led them to make those decisions.
How would you generalise from that? Because obviously if you have a specific company you have a certain sort of group of people who have made decisions about their retirement, is there any sense that that might apply to people in a differerent context?
Well yes and no, there is an issue around context because one of the things we don’t know really is to what extent does what the employer do change how the policy is interpreted? When the government implement the policy, obviously they have guidelines and rules and whatever, but the employment context and what the employer does could have strong impact, mainly one employer could speak very encouragingly about pensions versus another who disparages it or dismisses it, so there is an element of my study which wouldn’t be generalizable to other companies or contexts. But I’d also like to hope that some of the things I pick up about their motivations aren’t just tied to the context of where they are employed and are actually more related to the way they think about their lives or the world around them, and that would be more generalizable.
It’s interesting because pensions open up all these philosophical questions, sociological questions about what we value, how we think about our future, how much provision we are prepared to make now for something that many of us feel isn’t going to happen, am I really going to last until 85, I can’t really visualise that for myself now. And they are all clustered around this issue.
It’s becoming even more pertinent with the extensions of life expectancy. People now are the first generation of people who can expect to live until their 90, and if you expect to retire in your 60s that’s almost 30 years of post-retirement age, that’s a long time to have to prepare for. So the decision is becoming much more heavily weighted in today’s society.
Obviously, you’re an academic, you’re studying this subject academically, but I can see there could be serious policy implications to what you do.
Yeh, absolutely. I am part-sponsored by the Pensions Policy Institute, who are an education charity who work on policy issues around pensions, and by working closely with them I would really hope that my research would have some impact going forward.
Hayley James, thank you very much