Switching from a pension default fund could cost ‘DIY’ investors up to £247,000.
Our new research with State Street Global Advisors shows that DIY investors risk missing out on up to £247,000 by switching from their workplace pension scheme’s default investment strategy and making their own fund choices instead.
Workplace defaults: better member outcomes reveals the potential cost of 4 of the most common mistakes made by pension savers who choose to be their own investment manager rather than investing in a default fund.
It shows how different savers, who display particular behavioural biases, perform over 4 decades, compared to someone who stays invested in a well-run default fund throughout.
The saver profiles include:
- Cautious Connor – doesn’t like taking risks so invests in a cash fund
- Performance chasing Patricia – buys high into a strongly performing fund
- Eggs in one basket Elliot – fails to diversify his portfolio
- Forgetful Fiona – is initially an active investor but fails to keep her portfolio under review
The report also focuses on the lack of knowledge around charges paid on pension pots, with almost 8 in 10 (78%) of savers unaware that a fee is taken from their pot1.
Download our ‘Workplace defaults: better member outcomes’ report
1 Source: The FCA Financial Lives Survey found that 78% of defined contribution savers were not aware of charges on their pension.
Response to TPR’s annual commentary and analysis report
Commenting on TPR’s annual commentary and analysis report, Gregg McClymont, director of policy at The People’s Pension, said: “It’s fantastic to see that a growing number of people in their twenties are saving into a workplace pension thanks to the success of automatic enrolment, but millions of workers are still missing out because they’re too young, work part-time or don’t earn enough.
“While it’s encouraging that as many women as men now saving into a workplace pension, we can’t ignore that women are still significantly worse off than men in retirement and much more needs to be done to address this inequality.
“Lowering the age limit for auto-enrolment to 18; calculating people’s pension contributions from the first pound they earn; and reducing the amount someone needs to earn to be eligible for a pension could put billions more into savers pension pots, bring more women into pension-saving, and help hundreds of thousands of younger workers save towards their future.”
ENDS
Should I Stay or Should I go
Official statistics released by the Department for Work and Pensions show that just under one in ten of those who are eligible have chosen not to take part in their workplace pension, so we were interested to find out about the drivers behind this behaviour and what the final impact of the last increase in contributions in April 2019 will be.
The Research
The People’s Pension and SSGA co-sponsored a qualitative assessment with an independent research agency – Ignition House to understand why a group of individuals who had been offered a workplace pension had chosen not to join, as well as a group of individuals who had joined their workplace pension but had since chosen to stop their contributions.
Participants
Ignition House found 30 participants for the study – 22 people aged 22 to 60 who had been offered a workplace pension and had chosen not to join (opt out respondents) and a further 8 people aged 22 to 60 who had joined their workplace pension, but had chosen to stop their contributions (cessation respondents).
Method
Exploratory in-depth discussions were carried out to understand the drivers behind this behaviour and to understand what the likely impact of the increase in contributions in April 2019 will be.
Respondents came from a variety of backgrounds and experiences. A mix of people by age and gender, along with those working or small and larger employers across a broad mix of sectors were recruited.
Outcome
The research shows that opting out was merely a timing issue i.e. it hadn’t been the right time to start saving into a workplace pension scheme.
Other aspects identified included:
- There was little evidence that employers were seeking to discourage people from joining the scheme
- Little was done by employers (apart from large employers) to sell the benefits of auto-enrolment savings
- Some had misconceptions of the rules of auto-enrolment, including the perception that they needed to opt in but reframing and better information led to a “lightbulb moment” for example employer contributions being “free money”
- There was strong support for re-enrolment, as a “nudge” for them to reconsider
- The future impact of phasing was not clear cut.
Read the full report from Ignition House
Just under 1 in 10 people eligible for a workplace pension chose to opt out – according to the Department for Work and Pensions in 2018. So we worked to uncover the drivers behind this behaviour and what the final impact of the last increase in contributions in April 2019 could be.
Alongside State Street Global Advisors and Ignition House we worked to understand why people would opt out of a workplace pension or choose to stop saving into one.
The research shows that opting out was merely a timing issue – it hadn’t been the right time to start saving into a workplace pension scheme.
Other aspects identified include:
- There was little evidence that employers were seeking to discourage people from joining the scheme
- Little was done by employers (apart from large employers) to sell the benefits of auto-enrolment savings
- Some had misconceptions of the rules of auto-enrolment, including the perception that they needed to opt in, but reframing and better information led to a ‘lightbulb moment’, for example employer contributions being ‘free money’.
Download our ‘Should I stay or should I go?’ report
With the huge success of auto-enrolment, we were interested to find out what employees and employers really thought about pensions as a workplace benefit.
Our research, conducted by YouGov, revealed that employer pension contributions are among the most valued employee benefit, yet around half of businesses are failing to realise their worth. This means employers could be missing a trick with how their workplace pension scheme can help to attract and retain employees.
Our survey of 500 human resources professionals and more than 1,000 employers across the UK highlights how employers can play a significant role in helping their staff maximise the value of their pension savings but also benefiting their business by helping them to recruit and retain staff.
Download our ‘Employee and employer attitudes to workplace pensions’ report
