Anchoring and auto-escalation frontrunner remedies to low contributions – PPI

Autoescalation and anchoring are the frontrunner solutions for addressing the challenge of increasing contributions, according to the Pension Policy Institute.

Speaking at the launch of a PPI briefing paper in London this morning, the research body’s director Chris Curry said other policy options for increasing auto-enrolment saving beyond 8 per cent of band earnings presented challenges because they either required greater monetary input from employers or because they risked increasing opt-outs.

PPI figures show that a 22-year-old median earner paying 8 per cent of band earnings has a 49 per cent chance of achieving a target replacement income of 50 per cent of earnings, provided the triple lock is maintained. But this falls to around 33 per cent if the triple lock is dropped in favour of increases in line with average earnings.

If the individual has 10 years out of the workforce, the probability of achieving target replacement income falls to 34 per cent, with the triple lock in place.

The PPI has identified four options for increasing contributions; increasing minimum legal contributions for all employees and employers, requiring higher contributions for those higher earners that need to save more to achieve their adequate replacement income, encouraging or requiring employers to offer matching contributions and harnessing inertia through anchoring and auto-escalation.

PPI director Chris Curry says: “Perhaps the most interesting of the options for increasing saving rates is harnessing inertia through anchoring and auto-escalation.

“Auto-escalation has proved successful in the United States where we have seen it is possible to get contributions up to around 12 per cent before encountering a significant drop-off in people engaging with it.

“Anchoring, where employees have to actively opt out of increases is an interesting approach to this.

“Solutions such as requiring employers to offer matching contributions would have a good impact in raising contributions, but the cost to employers mean it would be difficult to get the consensus necessary to introduce it.

“Increasing employer contributions would be the most direct lever, but would create a risk of increased opt-outs unless compulsion was also introduced.”

JP Morgan Asset Management managing director, head of UK defined contribution Simon Chinnery says: “Auto-enrolment is helping but with an average DC pot size of £35,6000, clearly more intervention is needed.

“It is also the responsibility of all pension providers, including asset managers, insurance companies and corporates, to support such policies by designing and offering suitable products and solutions to enable advisers and pension trustees to make appropriate investment decisions and help them to spend time communicating and educating employees and individuals.”