Exaxe White Paper: Auto-enrolment – The socialising of pensions

An Exaxe White Paper UK: Auto-enrolment The socialising of pensions

By Tom Murray Head of Product Strategy Exaxe January 2012

intelligent solutions for life & pensions

Auto-enrolment: The socialising of pensions Contents

Introduction

2 2 3 3 4 5 5 6 6

From 2012, the UK government is bringing in auto-enrolment, a semi-compulsory approach to retirement saving, which will result in the automatic enrolment of all qualifying employees into a qualifying pension scheme.

Introduction Mistakes of the past If at first you don’t succeed Reaching out Communication is key Brave new world - Enter the social networks Anytime / Anywhere Cross-selling opportunities Conclusion

The aim of the auto-enrolment strategy is to move the UK to a position where the vast majority of UK citizens are saving to some extent for their own future pension provision. In theory, this should lead to a vast new market of consumers who are more aware of financial products and the benefits they can bring.

However, the issues involved in bringing a completely new group to the market are not straightforward and the ability to provide products and services to these consumers in a cost effective way ought to be at the forefront of every life and pension provider’s strategy for the future.

Mistakes of the past The Spanish philosopher, George Santayana, famously stated, “Those who cannot remember the past are condemned to repeat it.” In essence, this is the danger for those providers who are approaching the auto-enrolment process thinking it merely requires a low-cost version of their existing group pension products.

Providers need to remember that this is not the first initiative that has been undertaken to increase the amount of people saving. When the government decided that the pensions industry had no credibility, they introduced stricter disclosure requirements, designed to prevent consumers feeling that they were being ripped off.

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This didn’t have the effect required, as the public and press just seized on the information to criticise the industry for its cost base, so the next initiative was to introduce a low-cost alternative to personal pensions.

The stakeholder pension initiative, launched back in 2001, promised large take-up by lower earners by ensuring that charges would not be allowed to exceed 1% (later 1.5%). This project was a failure with only 1 million people contributing by 2004 and many of these had switched from an existing personal pension, giving no net gain in the overall amount of pension saving. Indeed of the 350,000 stakeholder schemes in place in 2004, 82% had no members at all1.

1. Waine, B. (2006). Ownership and Security: Individualised Pensions and Pension Policy in the United Kingdom and the United States. Competition & Change, 10(3), 321-337.

Auto-enrolment: The socialising of pensions If at first you don’t succeed...

Reaching out

Given the failure of these approaches, it was obvious that there needed to be a radical new approach if the government were to succeed in getting more people saving for their pensions. Focus on cost alone will not succeed in getting people to save; nor will providing them with large amounts of information.

The challenge for providers is to find ways to engage a completely new market that has had little or no contact with the pension savings industry in the past. They need to convince this market that the state will not support them endlessly into the future, that they cannot expect as a right the standard of living that current pensioners have and that therefore they need to be actively planning for their own retirement years right now.

Hence the decision to introduce auto-enrolment of every employee in the country into a pension plan, although the government fought shy of making it completely compulsory by allowing an opt-out for individuals who decide they do not wish to participate.

If the population is to be encouraged to save more for their own future, the harsh reality of their situation needs to be brought home to them.

So over the next few years, auto-enrolment will be implemented across the country in accordance with the following timetable: Nest staging dates Employer (by PAYE scheme size)

Staging Date

120,000 or more

1 October 2012

50,000 to 119,999

1 November 2012

30,000 to 49,999

1 January 2013

20,000 to 29,999

1 February 2013

10,000 to 19,999

1 March 2013

6,000 to 9,999

1 April 2013

4,100 to 5,999

1 May 2013

4,000 to 4,099

1 June 2013

3,000 to 3,999

1 July 2013

Staging dates for firms with less than 3000 employees are currently being revised by the government and are due for release in the first quarter of 2012.

The contributions will be split across three participants: the employee, the employer and the government. While the timescale is spread out over 4 years, each band of firms have been given start dates based on the size of the firm, as set out in table 1, and will have to automatically enrol their qualifying employees by that date; qualifying workers refers to the majority of full-time workers and part-time workers completing over 20 hours per week.

Fig. 1.

1. People are now living longer so they will spend more years not earning than any generation before them.

2. Life expectancy is increasing but healthy life expectancy is not increasing at the same rate. As a result most of the population will spend a greater proportion of their life requiring care than any previous generation.

3. Fewer workers will be available to support the older generations so the government will be forced to increase the age at which entitlement to state pension will start 4. The government will also have to effectively reduce the amount of that pension if they are to have any chance of maintaining the increasing number of pensioners on an ever-shrinking worker base.

Fig. 1. shows the pressures in favour of saving far outweigh the pressures to spend, if only the consumer can be made realise the position they are in.

Auto-enrolment: The socialising of pensions Getting this message out will require a combined effort by the industry and the government and will need to be creative in the way they reach out to this previously untapped market.

As this is a completely new market, it is clear that traditional methods of marketing, distributing and servicing financial products will not suffice. If they did, this market would already have engaged with the financial services sector.

The key points to note about the new savers is that prior to this, many of them have had no exposure to financial products as they have lived a lifestyle based on day-to-day consumption levels of 100% plus. They may have no spare cash or maybe just a small amount of rainy-day cash in a deposit account. The concept of investing for the future is one that they have never explored.

Auto-enrolment will forcibly introduce this new market to the idea of saving for their future. Once the middle and low paid sectors are enrolled in a pension, the primary goal must be to prevent them from opting out of the process.

While the pension will not be sufficient in itself to provide for their future, it is a start and will enable product providers to build on this base to help customers think about their future and plan accordingly.

As the Retail Distribution Review has priced these sectors out of the advice market, the challenge will be to find cost-effective ways to engage with this customer base.

Communication is key As with so much in life, communication is key, and information about pensions from the life and pension providers must achieve three goals; 1. It must communicate what the values of the products are 2. It must do this in a way that the message can be understood 3. It must transmit the messages through a medium that the target market will use.

The extent to which life companies can meet these three objectives will be the biggest factor in deciding who are the winners from the auto-enrolment process and who fails to make the grade.

1. Product value It has to be kept in the forefront of everyone’s mind that the

audience for auto-enrolment is primarily from that section of society that has very limited interaction with financial services products to date. They will have current accounts, perhaps deposit accounts and maybe a credit card or two; in other words their whole focus will have been on short-term financial products with obvious relevance to their immediate lives.

The challenge now is to engage with this customer base on a whole new level; one where they can be made to look forward to their longer term needs and deal with the uncertainty that arises from looking that far into the future. Products that are available for long-term saving cannot come with performance guarantees. This will be a shock to those used to the certainty of deposit accounts and credit cards, which are always certain if not always pleasant.

Previous generations’ interest in pensions was driven in their formative years by their knowledge of the difficulties of the elderly at that time. Scared by this, they took steps to ensure their own future position was protected.

Nowadays, pensioners appear comfortable and their circumstances exert less pressure on the younger generations to save.

The investment industry needs to find new ways to demonstrate the value of pension products to the individuals and the dangers of not making any provision without indulging in scare tactics.

2. Message The target market will not be used to thinking in terms that people in the pensions’ industry take for granted. Inflation proofing is a classic example and so providers need to be careful when giving projections to this market as they will be unused to the concept of taking inflation into account and are going to find it difficult to interpret the documentation accompanying the pension products. This has already caused problems in the compulsory superannuation market in Australia where the size of the projected funds has meant that many people have felt they were more than adequately covered for their retirement, when in fact in “todays” money the projected fund amounts were woefully inadequate. This reduced significantly the options for cross-selling individuals’ further products to support and broaden the range of their retirement plan.

How to get people, unused to difficult financial concepts, to understand products, which are by necessity complex, is one of the most difficult nuts to crack. It’s not just a question of simpler language.

Auto-enrolment: The socialising of pensions The ability to put across difficult concepts and use every day analogies to explain the value of the products is the only way of ensuring that customers engage with their new pension, stick with it rather than opt out and maybe go on to either increase their contribution levels or buy supplementary products.

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Providers who wish to enter this new market therefore need to spend significant time deciding how to approach it, as a straightforward cut-down version of existing products is doomed to failure.

It will also be necessary to engage in significant market segmentation, as it is a mistake to regard this new market as homogenous. It will range across all ages and lifestyles and the appetite for risk will also differ wildly. The propensity to plan for the future will also vary widely across the target group, therefore a one-size-fits-all approach is not going to maximise the return possible from targeting this market.

3. Medium Finally, in the task of engaging with the prospective customer base, the medium for the message is almost as important as the message itself. The difficulty is working out how any message can reach such a diverse audience.

This can only be resolved by identifying what are the common characteristics of the audience.

The medium needs to be one that is both used and trusted by the intended recipients. Television is rarely direct enough now and newspapers no longer hold the trust of the nation. What is needed is to use media that are intuitively used by the market segment so that they cannot avoid addressing the pension issue. It is vital that all opportunities are maximised to automatically bind trust of the medium to the actual message itself.

The following table shows the answer to a question posed in an ABI survey in 2011 - see fig. 2.

As we can see, the top two places people look to for financial advice, if they seek advice at all, are family & friends and the Internet. While financial advisers come a respectable sixth, their following is undoubtedly among the wealthier set that are probably already engaged with the financial planning sector. The new market is unlikely to turn to IFAs in any significant numbers, given the cost of financial advice post RDR and the fact that they are not being targeted by IFAs as a suitable market.

The survey shows, however, a massive 47% who are prepared to consult either the Internet or their own circle of friends and family. They appear to trust people they know and, curiously enough, the Internet. In order to reach this market, providers must look at ways of becoming part of this trusted zone.

Brave new world - Enter the social networks In 21st century society, online social networks are where the family & friends circle and the Internet collide. The optimal way of penetrating the mass market is to try to leverage social networking to engage with the market in a way that reinforces their tendency to trust the circles they are within.

This is a whole new strategy for providers, most of whom have minimalist social media presences at the moment. Most corporate social networking strategies are primarily focused on mass marketing campaigns and brand protection.

However, social media remains a key way to engage with consumers and to leverage their social interactions to gain trust in the solution. In order to achieve this, new strategies are required which enable direct contact with the consumer via social networks and mobile platforms; the way that a majority of the new market prefer to communicate.

Any company with a strong social network strategy will be able to leverage the consumers’ trust of their peer network to establish credibility with the target market.

Anytime / Anywhere Use of mobile technology has now spread far further than was originally imagined. Across all age groups, usage of mobile phones has increased and the arrival of tablets has transformed the market dynamically.

Auto-enrolment: The socialising of pensions In 2011, 45% of British adults who accessed the Internet over a three-month period did it on their mobile phone.3 In particular, the key age group of 25-34 hit a usage rate of 65%.4 Although statistics are yet available for tablet usage in the UK, the sales growth seen globally in 2011 has been over 200%5 and the UK will almost certainly have followed that worldwide trend.

With the rapid expansion of usage across the age group who will benefit most for the auto-enrolment process, the opportunity to utilise these platforms to reach the mass market has become a real one. If this audience is to become interested in their own financial future, it is through modern media that it will be achieved.

Young people no longer have a concept of booking appointments weeks in advance and turning up to someone’s office to spend two hours engaged in conversation over a desk. When they want information to support a decision, they expect to have it immediately, even though this is unreasonable at times. However, this is the way that technology is taking them and it isn’t going to change.

So fulfilling the needs of the ‘right now’ generation is going to require an ability to engage with them across all platforms, particularly mobile. On the plus side for providers, while it means a new range of technologies, these are more cost effective and are probably the only way that this market can be profitably serviced, as face to face strategies are prohibitively expensive. So without this level of automation, strategies to build on the auto-enrolment process will undoubtedly fail.

Cross-selling opportunities The goal of all auto-enrolment strategies is to build and maintain the customer base and cross-sell, this being the only way to cost-effectively service this market. Associated items such as ISAs and protection products have great possibilities for this market once they are engaged with a provider.

vast access across cheaper media to this pool of potential purchasers and will be a big driver, not only in keeping the cost of sale down but, more importantly for the long term, keeping the cost of service low as well.

It also allows providers to leverage the trust that consumers have in the financial choices made by their friends and family and allows a rapid, virtual ‘word-of-mouth’ approach to succeed.

Given the rapidity of development for the mobile market, dynamic up to date apps can be produced at relatively low cost and upgraded regularly – an approach expected by the clientele and one which will allow rapid response to market and technology changes.

Conclusion Auto-enrolment provides major challenges for providers and yet it is a tantalising new market ready to be sold financial products for the first time. Reaching this market requires a completely new strategy than before, which must embrace new technologies and new messages that will resonate with the ‘social’ generation.

Investment in the key technologies for socialising the long-term investment message will provide companies with a key differentiator in reaching this market. Without new strategies based on the social networks that people use and the new technologies they use, providers will unable to reach this market effectively.

Social networks and mobile technologies are rapidly changing the way people live in the UK, and all businesses need to adapt in order to survive in this new world. Those who ignore the changing social climate in the UK may well be left out in the cold.

About the Author

The ability to push messages across social media and to allow anytime / anywhere access to information and sales systems will be an essential part of bringing products to this market and raising the amount of financial cover held by the general population of the UK. A marriage of social media and mobile technology will give 3. UK Office for National Statistics; Internet Access – Households and Individuals – Tables 2011.

4. Ibid.

5. Source: tablet data: Gartner www.twitter.com/exaxe

Tom is Head of Product Strategy at Exaxe with primary responsibility of overseeing product direction. Tom has extensive experience of managing web based insurance software from conceptual design through to commercial release and beyond. Tom has been leading the development of the Exaxe Internet insurance architecture since August 1999

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