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Different solutions are needed, delegates told by NEST Insight

NEST Insight’s William Sandbrook said auto enrollment in a defined contribution plan might not be the right answer for workers in a flexible economy.

Automatic enrollment and escalation might not be the right solutions for the defined contribution arrangements of flexible workers, delegates heard during a recent briefing with plan sponsors and managers in London by NEST Insight, the research unit of the 2.7 billion ($3.6 billion) National Employment Savings Trust, London.

As retirement needs are changing, meeting those needs in the context of saving plans requires rethinking of policy and plan design for the flexible economy workers and the self-employed, speakers agreed.

Charlotte Clark, director of private pensions and stewardship at the U.K. Department for Work and Pensions, speaking June 28 on the panel said, "Auto escalation is a fantastic idea but there is no way to legislate for it in the whole of the retirement system." The 8% total contribution, which the U.K. system will get to in April 2019, "is about right, but there is no one right contribution for all of the workers, including millennials, Generation X and those that will not benefit from the safety of the defined benefit pension," she said.

Ms. Clark added, "And different attitudes toward risk and volatility among different people raise questions about the need for different product design."

William Sandbrook, executive director at NEST Insight, said during a separate panel, "Auto enrollment may not be the right solution for a defined contribution savings system in the flexible economy."

Mr. Sandbrook said evidence suggested that a lot of the self-employed draw all of their income from self-employment so "it is not just about putting away savings" from extra income.

"The evidence also suggests that liquidity matters for the self-employed due to the volatility of their income," he said.

"Therefore these groups are choosing liquidity savings vehicles over retirement savings vehicles. But there is little disparity as to the demand for savings vehicles. The numbers (for the employed and self-employed) are roughly the same," Mr. Sandbrook said.

"We have to rethink the retirement product design for the self-employed as they may be psychologically different and have different attitudes toward the risk," Mr. Sandbrook said, noting that a hybrid model or a liquid account, like the sidecar account that NEST is testing, could be a better alternative. "Workers could be accumulating savings through an account that only locks the retirement savings away once a set limit is achieved."

"I wonder whether a hybrid product is more appropriate where locking away of the savings is more sequential," Mr. Sandbrook added.

Mr. Sandbrook said auto enrollment is not a panacea."Auto enrollment is fundamentally based on inertia, not active choice and engagement. So we need to think which components of auto enrollment can be replicated into (an arrangement) for the self-employed," and which should be reconsidered. "We should avoid talking about activating auto enrollment for the self-employed because it will be not effective," he said.

However, the retirement industry could think about an automatic payroll deduction equivalent as more people move to receive income through online invoicing software, he added.

Mr. Sandbrook said a digital payroll system, which application-driven employees such as Uber drivers are using, might be a more appropriate route to deducting retirement contributions. "If employers are not active as aggregators of contributions we need to think about other solutions (and) who could become these intermediaries that would facilitate automatic contribution deduction."

"One solution could be large-scale contracting organizations (that provide staffing)," he said.