When the default becomes the norm

The Turner Commission’s design for auto-enrolment drew on US research showing that inertia could be used to keep people enrolled in pension schemes, and they were right; AE opt-out rates stayed below 10%. The same research showed that defaults can anchor savers at minimum contribution rates.

The Commission proposed a minimum of 8% of band earnings, with the expectation that people would voluntarily save more on top. The minimum was intended as a floor and keeping it low was a deliberate choice to avoid high opt-out rates. Even at 8%, opt out rates of around 33% were expected.

Auto-escalation, a tool the US evidence had identified as effective at raising contribution rates gradually, was not adopted, probably because the behavioural case for it was not yet established.

DWP said before AE launched that the available evidence on how people would respond to automatic enrolment was drawn mainly from the US, difficult to apply to the UK context, and produced contradictory findings. In particular, it was not clear whether opt-out rates might be high, or whether low minimum contribution rates would encourage people to save more voluntarily.

In the event, opt-out rates stayed low. But contributions also stayed low. The second Pensions Commission’s interim report, published this month, confirms that one third of eligible private sector employees contribute only at the AE minimum, rising to half among the lowest-paid. The voluntary saving that the original framework depended on “has not materialised” for low and median earners.

The point is not that the original Commission got things wrong, but that the policy context has now changed and we have around 15 years of data on responses to defaults and contribution increases. Wherever the second Commission proposes to use defaults as a mechanism, it should draw on that evidence fully, including what defaults imply for behaviour beyond the immediate one being targeted. And if the final report assigns any role to voluntary saving, it needs to map out directly how that extra saving will be effected.