Pensions: refuseniks and renters

31 Jan 14

People who rent rather than own their own homes are more likely to opt out of workplace pensions. This provides another reason to boost homebuilding and to think through the interaction of housing and pension policy

The government’s auto-enrolment reforms to workplace pension saving arguably represent one of the coalition’s biggest projects – the staged implementation doesn’t even complete until 2018, having begun in October 2012.

The reforms have one central aim – maximising participation rates in pension saving. Three key measures are being deployed to achieve this: ensuring more workers have access to a decent workplace scheme; compelling employers to make matching contributions in order to boost incentives to save; and applying auto-enrolment to exploit inertia such that workers have to opt-out of their employer scheme if they are not to save.

Of course, it has always been expected that some workers would indeed opt-out, although initial evidence from the Department for Work and Pensions suggests the opt-out rate is pleasingly low: around one in ten of those automatically enrolled.

However, with the number of opt-outs steadily increasing, policymakers need to think about how participation can be lifted even further.

Given the absence of detailed available data on who pension opt-outs are – it will be several years coming – the Strategic Society Centre undertook a study with the Institute for Social and Economic Research at the University of Essex using the Wealth and Assets Survey. We examined a group who have long existed – the ‘eligible non-savers’ – who already reject two of the three elements of the government’s reforms, ie access to a workplace scheme with employer contributions.

A number of findings stood out.

First, the prevalence of eligible non-savers among those workers with access to an employer scheme with employer contributions was around one in ten, ie similar to the opt-out rates observable among the first phase of employers subject to the government’s new rules on pensions. This suggests it is access to a scheme and the incentive of employer contributions that may ultimately have the most effect on participation.

Second, the key factor that predicted being an eligible non-saver, even after controlling for the effects of other factors was simply being a renter. Various hypotheses can be linked to this, for example, issues of affordability, or renters directing their savings towards deposits to purchase a home.

However, such was the strength of this effect, it is rather worrying given rampant house price inflation and projections of declining rates of owner-occupation. Indeed, it provides yet another reason to boost homebuilding, and to carefully think through the interaction of housing and pension policy.

Third, as well as certain ‘objective’ characteristics, ‘eligible non-savers’ stood out for their attitudes to and relative knowledge of pensions, and for their financial management and behaviour. This is arguably to be expected, but given the apparent strength of these effects on participation, it suggests these factors would be a very good starting point for policymakers to think about how to minimise opt-outs through targeted interventions to persuade workers back in.

In a discussion paper to accompany the research, the Strategic Society Centre has put out some relevant ideas, such as regular ‘lost contribution’ statements for opt-outs so these workers can see the accumulating value of contributions they are missing out on. We also think that those opt-outs identified as having more chaotic finances could be nudged into debt management and repayment plans, built around the end-point of opting back in.

But the broader point is this: auto-enrolment means that pension refuseniks are defining themselves as ‘opt-outs’, and this offers a big opportunity for government to frame their decision, guide their thinking and make use the opt-out ‘journey’. In short, post-2012 pension opt-outs shouldn’t be seen as a policy failure, but an opportunity for policymakers to zone in on those groups most resistant to saving for their retirement.

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