“A bird in the hand is worth two in the bush.” An old saying, but one that quite neatly sums up the attitude of many of us mere mortals. But just how true is it?
The human propensity for immediate gratification has been widely researched and well documented. One of the most famous examples is the ‘Stanford marshmallow experiment’, conducted in the late 1960s and early 1970s. In these studies, a child was offered a choice between receiving one small reward immediately or two small rewards if they waited for 15 minutes, during which time the tester left the room. As you might expect, many of the children found it impossible to resist the treat on the table, despite the promise of an additional treat if they did. In follow-up studies, the researchers found that the children who were able to wait for the bigger reward went on to be more successful in life (as measured by various metrics such as SAT scores, educational attainment, body mass index etc).
Today, our need – and expectation – for instant gratification is greater than ever. Technology allows us to do so much ‘now’ that our ability to wait is in serious decline. Instant messaging. Buy now. Online streaming. Immediate answers to almost any question just by typing in a search engine or asking Siri/Alexa/Echo. It is no great surprise then, that getting people to save for their retirement can be such a challenge.
Prior to the introduction of auto-enrolment, it always amazed me just how many people did not join their workplace pension scheme and benefit from the extra money available from their employer. I accept that this is not solely down to our ‘now’ mentality. There are many other factors at play here; understanding, affordability, inertia, trust – and so on. However, I’d wager that the same people who chose not to take, for example, a 5% employer contribution would absolutely have said “yes please” if offered a 5% pay rise. Money now is hard to refuse. Money I can access at a distant and difficult-to-imagine point in the future, from a product that is hard to understand, does not typically hold the same appeal.
In April, the first increase in the phased minimum contributions under auto-enrolment commenced. Thousands of workers saw their pension contributions go up, and their net pay go down. For many people, the reduction in their net pay is the more obvious side of the equation. Of course, the auto-enrolment legislation requires us to inform our workers of the change in contribution rates. So, in theory, there should be no surprise. However, we all know that the percentage of people who actually read their pensions information is pretty small. And the percentage of those who understand it is, sadly, even smaller.
Fortunately, auto-enrolment has turned our inertia into a positive. Opt-out rates have been much lower than many anticipated and the UK can now boast of higher-than-ever pension scheme membership. The Office for National Statistics (ONS) tells us that 6.4million people were active members of defined contribution (DC) schemes in 2016; a 62.5% increase when compared with 2015. Amazing progress in anyone’s book. But we also know that the starting minimum contribution levels are not nearly enough to provide an adequate income in retirement. The phased increases are therefore essential, and a definite cause for celebration. The challenge now is to make sure our workers also see these higher contributions as a good thing, ensuring our record levels of pension membership continue – despite the increase in cost.
Against a backdrop of years of austerity, pay freezes and rising living costs, persuading people of the merits of ‘less now, for more later’ is easier said than done. The template wording provided by the Pensions Regulator, though helpful, is dry to say the least. Employers need to shout about the fact that the contribution they’re making for employees is also increasing. Crucially, the communication and education process needs to be an ongoing journey – not a one-off, bland letter that is easily ignored. Real-life examples, plain English, graphics and diagrams can all help make pensions more understandable and accessible for everyone. Make it clear to your members that the reduction in their net pay is accompanied by a much bigger increase in the amount being paid into their pension each month.
For those who are fortunate enough to work for an employer who does not require employees to contribute themselves, the message is of course far simpler. However, the importance of ensuring your workforce understand and appreciate the pension benefits you’re providing for them remains. You’re doing a great thing for your staff, at a significant cost to your business. Make sure they know about it – and remind them that, in this case at least, the ‘two in the bush’ are actually more valuable than the ‘one in the hand’ after all.