Behavioural economics teaches us that the majority of people believe making investment decisions is difficult and complicated, and as such they avoid taking any long-term decisions. This creates a barrier for people needing to save for their retirement. They either find it hard to make the right investment decision or will refrain completely from saving.
Many people will either lack financial capability, time, motivation or self-control with regards to retirement planning decisions. In order to deal with complexity and uncertainty, human nature will take the path of least resistance and avoid decision-making even if it is in their best interest.
The consequence is that people do not start saving for their future until it is too late. There is a simple solution to this which is already being used successfully throughout the world – Workplace Savings including auto-enrolment.
The concept is very straightforward. All employers over a certain size are required to facilitate access to a savings scheme for all employees, with personal contributions being deducted from payroll and invested in a pre-selected default fund. Typically, this default fund should offer guarantees or a lifecycle strategy which automatically de-risks the savings as one approaches retirement.
The auto-enrolment part means every employee automatically joins the scheme and starts saving unless they choose to opt out by signing a note to that effect. Given that everyone knows they need to save for their future and the human inertia effect, it has been proved that the opt-out rate in such schemes is incredibly low (just nine per cent in the UK for example).
Auto-enrolment through the workplace not only avoids the complexity and costs of second pillar pensions (employers do not need to contribute but are free to do so if they want), it enables people to start saving for their retirement without having to make an investment decision or find the personal time to start a plan. Advice is available through the workplace for those who want it.
Stuart Fairbairn is chief officer, Business Development at MSV Life PLC.