As the world’s largest building society, Nationwide knows quite a lot about the nation’s savings habits but after assessing its company pension scheme in 2014, it became apparent that staff were not quite practising what they preached.
Just six per cent of the 12,000 members of Nationwide’s defined contribution pension scheme were making additional payments of up to three per cent even though the building society promised to match these. In short, they were forgoing the chance of ‘free’ money for their old age.
But today 84 per cent of the scheme’s members make additional contributions, an unprecedented statistic across British industry, after Nationwide used nudge theory and an extensive engagement programme to change employees’ behaviours and bring the retirement story to life.
The initial problem, according to Nationwide’s head of pensions Ian Baines, was a perennial one: pensions just appear too dry and boring. ‘All young people think they will be young forever,’ he says. ‘People accept that pensions are important and that they should do something about it, but they live in the here and now.’
He adds: ‘The ‘me now’ is selfish, the ‘future me’ can look after himself. We started to look at behavioural theory to break that thinking down.’
It was against this background that Baines and his team looked at ways in which they could encourage Nationwide’s employees to think about their pensions and actively consider what they wanted their retirement to look like. ‘It was about how do you get them to engage but if you start out with ‘greater engagement’ as a goal, you’ll never achieve it,’ adds Baines.
Simply launching a campaign that said ‘use your extra contributions’ also was unlikely to work, because employees were already aware of the benefits from doing so (free money) and yet still chose not to.
The team started to consider whether Nationwide’s defined contribution scheme was fit for purpose and whether it ultimately provided employees with the pension that they wanted. It engaged with employees, discussing their concept of retirement and asking about their aspirations and dreams of old age.
‘The VW camper van featured a lot,’ says Baines.
The Don’t just dream it, plan it! campaign which ran between March and April 2015 started to raise the issue of pensions. Branch managers were given advice and tool kits to enable them to lead workshops on the subject. ‘It couldn’t be a specialist team from head office preaching from their ivory tower,’ explains Baines.
‘It involved the leadership team right down to the branch manager, and part of the challenge was to get a line manager to talk to their colleagues about a subject that frightened them all. We had to strip it all down, and provide briefing packs that demystified the subject.’
All people managers with a team of more than six also received a kit to create a poster depicting their retirement dreams, which were uploaded onto the company Intranet, as part of a company wide competition.. Information started to appear in the staff newsletter, briefings were held by the pensions team which showed employees how the money they set aside today would have a dramatic impact in the future, and determined whether that camper van retirement dream became a reality.
‘We had to show them that if they paid a little more, how much bigger the pot might become,’ says Baines.
The original Nationwide defined contribution pension scheme was pretty standard. The building society made a nine per cent core contribution while employees made a four per cent core contribution. If employees actively chose to make an additional three per cent voluntary contribution, Nationwide would match that.
The scheme also offered a ‘death in service’ life assurance pay out of four times salary.
The majority of employees opted to make the minimum core contribution, resulting in a monthly contribution of 13 per cent, against a potential maximum 19 per cent.
But Baines and his team, working with pensions provider Friends Life, started to look at whether the scheme could be improved as part of his ‘carrot and stick’ approach. ‘The lightbulb moment came when we realised that if we wanted them to save more to get more, in other words to contribute more to their pension, we had to change the default,’ he explains.
The annual ‘default’ option had been set at the minimum four per cent; employees had to actively opt in every year to make additional contributions. But Baines and his team started thinking about what would happen if the default was set at a higher level, and employees had to opt out and deliberately choose to pay the lower contribution.
‘We would be using people’s natural inertia and apathy to make them pay more to get more,’ he explains. ‘In the longer term it would be better for them, but it would lead to a reduction in their disposable income.’
But introducing such a change would also lead to added costs for the society; where once it had made additional contributions for just six per cent of its pension scheme’s members (around 720), in theory it would now be footing the bill for every single one of the fund’s 12,000 members.
‘Nationwide is a mutual, owned by its members, so when it comes to the way the society is run, it is down to the board and management committee,’ says Baird. ‘We had to consider how our members would view an increase in our pension running costs and whether we could rationalise that it was the right thing to do.
‘But we want our members to save and we should also be getting our employees to save more, it is aligned with our key principles. We looked at the costings. But this was not simply about putting more money into a pot, we have a responsibility to our employees as well. This is about creating gains for them in the future.’
As an added carrot, the team improved the scheme. Nationwide’s core contribution rose from nine per cent to 13 per cent, plus the society would add another three per cent to account for the additional contributions that staff would now automatically make. The total money set aside for each employee’s pension rose to 23 per cent of their salaries, but they only paid seven per cent.
In other words, for every pound they put aside, Nationwide was paying more than two.
Other changes were made. The life assurance aspect doubled to eight times salary, while employees also no longer had to wait two years after joining to receive the full benefits of the scheme. They would be on an equal footing from day one.
Stories were written for Nationwide’s Intranet explaining about the enhanced pension and what the society planned to do about staff contributions, plus a short animated video, while each member of staff received a personalised letter explaining what the changes would mean at an individual level and what their extra costs might be.
Graphics also illustrated how their pension pot might look in ten, 20 or 30 years if they chose not to opt out and paid the higher amount, and also how that changed if they defaulted to the minimum payment.
‘We couldn’t do it with a month’s notice,’ says Baines.
‘We had to explain to every person that contributing an extra three per cent to their pension meant that money would not go into their bank account every month. We issued individual statements. It was a communications exercise. We didn’t dumb down but we had to be mindful. Some terms had no meaning or resonance to people; the use of language was really important. For example, this is all about percentages but not everybody gets them. They didn’t convert three per cent into a figure. It was lightbulb moments like this that led us to recognise that it was not about using technical phrases to prove our credentials but about using regular language. We had to explain that this is what they would now pay [seven per cent] unless they chose to pay less.’
The improved pension scheme was launched in September 2015, with the new higher contributions implemented for staff the following January. But Baines soon found out, it does not matter how comprehensive or extensive a communications exercise is, there will always be those for whom it has passed them by.
‘We got calls from people that revealed everything we had sent them had gone over their head because the question they asked was Why has my pay gone down?,’ he says.
The new scheme allows members a two month window to ‘opt out’, every October and November, and in the first year 14 per cent of employees reverted to making the minimum core contribution to their pension. Today, 84 per cent of Nationwide’s employees make the maximum seven per cent contribution to their pension, although the percentage figure is slightly distorted by 600 employees joining the scheme.
‘From the feedback we have received, the reason is about affordability,’ says Baines. ‘But we want to use this new pensions saving norm to say to people You’re in a minority here – the majority of your colleagues and friends are paying more in. We want to use that behavioural nudge where people don’t want to be the odd ones out to their advantage.’
On average, across British industry, just nine per cent of employees make the maximum contributions to company pension schemes so Nationwide’s achievement is exceptional.
‘We have had a number of companies approach us about our experience, but at its heart, this is about the employer and employee paying more, and many employers and employees will be resistant to that. It is also something that has to fit into a company’s remuneration strategy.’
But Baines is not resting on his laurels. Nationwide has created an internal pension fund website, which offers up-to-date information and interactive communications for members, and a Guided Outcomes (GO) portal with personalised data, to which they can add details of their other investments.
We want our employees to ‘own’ their wealth. We want them to think of a pension as part of their assets. If we call it a current account, which you can’t have for a couple of years, then it is understandable. But if we call it a pension, there’s an immediate barrier. It’s about being clever with wording,’ he explains.
The portal also includes a GO tool that employees can use to see if their retirement savings are likely to provide sufficient funds to meet their ultimate goals. For some, it will reveal that they either increase their contributions or work longer.
‘It is nice to see in real time what their retirement pot looks like,’ says Baines.