Transatlantic dialogue: pension megatrends in the US and UK

A snapshot of the highlights

A private dinner engagement in Sandton and equivalent luncheon in Cape Town, hosted by Sanlam Investments, was held with the heads of two of the largest retirement funds in the world. Fellow fiduciaries, Mark Fawcett, CIO of National Employment Savings Trust (NEST) and Sonja Kellen, Global Director of Pensions for Microsoft from the US shared fascinating insights from either side of “the pond”. Amongst some of the highlights were innovation in member engagement and communication, and leveraging behavioural finance to ensure better outcomes for their members.

Innovations in auto-enrolment

Sonja Kellen described auto-enrolment in Microsoft’s US pension plan as one of their greatest innovations.  Says Kellen, the problem in the US is that people were often auto-enrolled at a too low rate (6%), which they would then take as an endorsement of the correct savings rate. In fact, the right savings rate should have been a lot higher (10% or more). So Microsoft partnered with their recordkeeper and created a product called ‘Easy Enrol’, to create a new plan from scratch. They discovered that whatever was put first in the menu of options would most likely be picked. So they placed the highest percentage savings contributions first, resulting in an astounding two-thirds of their members selecting the highest savings rate (12%). As a result, people enrolled faster and saved much more than before. Says Kellen, ‘big data’ was (and remains) a big part of Microsoft’s innovation.

Other innovations centre around financial wellness, says Kellen. Financial wellness is a big buzzword in the US, particularly in the DC space. What did Microsoft do differently?

Behavioural science

We noticed that people were far more likely to take action even with a small incentive. Microsoft took this into account to incentivise member savings and started tying positive financial behaviours to an incentive. While there are existing incentives attached to a health wellness check-up, such as biometric screening, flu shots, etc, now a financial check-up has been added to the mix to qualify for the incentive. Says Kellen, Microsoft achieved an astounding 50% engagement in the first year through this initiative.

Microsoft also incorporated behavioural science learnings into their email campaigns to counter behavioural issues such as loss aversion and inertia. Personalised messages were sent, such as “You have 450$ unutilised, you should be maxing up” along with recommendations to take a specific action. Members were divided into different groups, and segmented and profiled based on savings behaviours and where they were on their savings journeys. Messages were customised for these different groups.

According to Mark Fawcett of NEST, behavioural economics has had an equally strong underpin for auto-enrolment in the UK. We used tactics to make it emotionally harder for people to opt out, by asking pointed questions, for example “Are you sure you can afford not to save?” linked to savings behaviours. Through this, they managed to reduce opt-out rates by as much as 25 to 30% as a result of two simple behavioural nudges: loss aversion and procrastination.

NEST also started talking to people in simple language. Says Fawcett, “We never use the word ‘pension’: people find it boring, so we prefer to call it retirement income”. We introduced a phrase book so that we could try to talk in simple English and not jargon. Where necessary, we would explain terms such as annuitisation, which really transformed the conversation with members completely.

Where are the next big innovations?

Says Mark Fawcett, at NEST the big question is how to give people a retirement income for life? Annuitization is not compulsory in the UK anymore, so we need a retirement income product that really works, doesn’t require a lot of engagement or involve complex decision-making. Members have peace of mind in obtaining an income for the rest of their lives. At NEST, says Fawcett, we’re working on a hybrid product with a low-touch drawdown combined with longevity protection and blending the two. In the previous model, members would have to go to a financial advisor and pay considerable sums for the advice, which would erode the potential income stream generated.

Says Fawcett, member engagement is an ongoing challenge. “Pensions are typically perceived to be boring, so we simply cannot expect people to engage willingly on the subject”.  The main questions we ask are:  Are you saving enough for retirement and do you know when to retire? In addition, what are the life events that get you to start thinking about retirement?  We keep our engagement very basic to avoid complexity.

With regard to member communication, we focus on using plain and simple English to engage members better. We make our website look more interesting (like Amazon) not like a typical one-dimensional pensions website, and it is designed to be user-friendly. We try to make it fun and exciting. Risk as a term carries negative connotations for most people – they tend to catastrophize and think they are going to lose all their money. So we’re very careful about the terminology we use; we frame words in the positive when we talk about investing and risk. We try to make it real and tangible.

What are the hot topics in the US and UK at the moment?

Says Sonja Kellen, the big thing for us in the US is around fiduciary conflict of interest. We are trying to apply fiduciary standards that sponsors have always had to uphold, and ensure broad uptake so that everyone acts in the best interests of their client’s.

For NEST in the UK, the big question is: are pensions still relevant? Contextually, there has been a shift towards changing tax incentives, ISA lifetime savings (long and short-term savings), etc. There is a lot of uncertainty about whether pension savings is a good idea. Says Fawcett, we really all just need to settle down and get people to start saving on a regular basis and promote the worthiness of saving.

What is the elephant in the room for fiduciaries?

In the US, says Kellen, the lack of savings is the big thing for us; we’re in a savings crisis, particularly since the shift from DB to DC plans. Overall national savings are at record lows, around 4%, when we should be in the 5 – 9% range.