Universal Workplace Savings Meets Global Defined Contribution: 2020

We talk with Will Sandbrook about Universal Workplace Savings, Emergency Savings, and NEST pensions UK.

Will Sandbrook, Executive Director, NEST Insight

This week we carry forward the theme of global defined contribution – focusing on the concept of Universal Workplace Savings and taking a look at insights from one of the newer programs that bears a kinship with retirement savings innovation in the US. With us as a guide is Will Sandbrook, Executive Director of the NEST Insight Unit at NEST - National Employment Savings Trust.

Backstory. We won’t cover all the history, but in 2008 the UK passed a significant pensions act aimed at increasing workplace retirement plan coverage. The act created country-wide automatic enrollment for 33 million workers, about half of whom were not previously covered by retirement plans. Workers retain the ability to opt out of retirement savings, but all employers must offer or facilitate a retirement savings plan. The Act established the National Employment Savings Trust (NEST, for short) as a public provider for employers who didn’t have or choose a private sector provider. NEST took its first contributions in 2011. As of June 2020, the NEST program is serving 9.2 million savers who have accumulated over $11.8 billion toward their retirements.

Let’s get to it. We hit Will with 5 quick questions. We think you’ll love this deeper dive into his answers.

Will, we have so much to talk about because you have so much going on. You’ve been working on the NEST program since before it went live.

That’s right - I joined in 2009. We went live in pilot form in 2011, and at scale in 2012. NEST is one of the options employers can use to meet their retirement plan obligation. And so it's particularly focused on low- and moderate-income savers — people in smaller firms, people in high turnover bits of the labor market.

Remind us – what are some of the key characteristics of NEST and its peers

A couple of things worth noting. Our legislation covers all employers – down to one employee. That gave us a big leap forward with regard to workplace coverage. We looked at alternatives, but in the UK automatic enrollment with savings at the “point of paycheck” made the most sense. Second, in our system employer matching contributions are compulsory. Automated savings started at the 2% level – 1% each contributed by the employer and the saver. We had our first auto-increase in 2018, bumping savings up to 5% (2% employer and 3% employee). In 2019 we auto-increased to 8% (3% employers and 5% employees).

Wow – those are meaningful changes – what’s the impact been on participation?

I can share good news on this. First of all, we’ve been fortunate to have very high participation rates over time – with overall NEST opt out rates around 7.7%. This is better than originally forecast and we’re glad to see it. It’s worth noting that covered workers include those are at least 22 years old, making at least £10,000 (about $12,500). So, we do naturally exclude from automatic enrollment those in the lowest earning categories. [Side note for the US, about 28% of the workforce earns $15,000 or less a year].

It was built into the UK policy that everyone involved would start out at lower contribution rates, and then both the employee and employer contributions would step up a couple of times once everyone was in, to get to a more sustainable level. In a sense there’s a really big “no news is good news story” - because essentially what happened both times is people didn’t do very much. They kept on saving and absorbed the increasing contributions in stride.

Statistically, you can find some behavioral effect in terms of a little bit of opt out or cessation. But when you step back to the macro level, it’s tiny.

In the first round of escalation, opt out rates for new enrollees went up very slightly, to just above 6%. In this round they rose a bit more, to about 9.5%. But participation rates are still over 90%, much higher than was forecast at launch, and this is something we are keeping an eye on. We’ve got a great piece on this for anyone who would like to know more.

Let’s turn to some of the analytics and research you’ve been doing. We know you’re focused on is the concept of Universal Workplace Savings and a comparison of existing models across countries.

So, this concept is really about increasing participation by making work-based access available more broadly. We’re talking about a universalized participation concept for savings.

We’ve just taken a closer look at this, comparing the systems of a number of countries across key dimensions. Our goal here is to help leaders begin to think through excellence in design, and what it might mean in their circumstances.

One challenge all countries face is this idea of universal workplace coverage – and there are a range of approaches. I’m interested in what’s similar across current programs, and what’s different. It looks like we’re gradually moving toward mass participation in defined contribution saving as a key component. So we are thinking at a high level - how do we show best practices for systems that get people financially ready for retirement.

We see commonality between systems, but we also see all sorts of different flavors around. For example, does policy focus more on driving up participation, or does it focus more on making sure there’s a good supply option for everyone, leaving participation more up to the individual?

We also look as well at what the purpose of the system is. Some systems are much more purely focused on generating retirement income. Others are more broadly focused on getting people to save, and that money may be available to them for things other than retirement, or it may be available as a lump sum at retirement rather than specifically directed to income generation. We see a fair amount of local variation in the details.

In fact, I believe there is no one right answer. The reality is that countries looking to address retirement security will be reforming something that’s already there – no-one gets a blank sheet of paper. But there are emerging best practices and approaches that appear to have more, and less, impact on coverage, savings, and retirement income sufficiency.

In the UK, similar to the States, we’ve had a pretty mature, highly functioning commercial DC sector. That’s always going to influence where a government goes, in terms of how to try and fill the savings gap. Are there legitimate vested interests there, how is the system going to change and not; that influences what gets considered.

In other countries where they come from more pay-as-you-go Tier 1 systems and there isn’t such a mature private savings system, they may have more flexibility with regard to how the design this new part of the savings tier.

So it’s been a very interesting exercise looking at these designs focused on mass take-up, easy saving as a key component of a retirement system.

You’re also focused on Emergency Savings – why is that?

The UK is different than the US in that retirement savings are essentially locked up until age 55, except in cases of extreme ill health. We don’t have the same type of during-career access that US programs offer, such as loans and withdrawals. But we know people have hardships that call for emergency savings. So we are exploring the use of retirement-adjacent sidecar savings accounts. You’ve got some experimentation like this starting in the US as well where linking emergency savings to retirement savings can meet two goals with one automated approach.

By the way, the pandemic is going to give us some comparative data across countries, as well. In a few years we’ll be able to assess what it means when you can (US and Australia), or can’t (UK), access your retirement savings for an emergency like a COVID-related job loss. It’s an interesting trade-off of short and long term priorities. In fact, we have a really great partnership with the Aspen Institute’s Financial Security Program, where we work together to compare the US and UK systems, share ideas and amplify research – we’ll be working with them to look at how these trade-offs have played out on either side of the pond in the months to come.

Will, thank you so much – your experience gives us a lot to think about as we work on expanding retirement security in the US. Interested in more? You’ll find useful information at NEST and the NEST Insight Unit. You can also reach out to Will Sandbrook directly.

This piece was featured in June 18, 2020 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.