Automatic enrolment: examining the evidence Maureen Maloney J.E. Cairnes School of Business & Economics, NUI Galwa PPRG Conference 17 June 2015
Outline • Introduction • Research question • Definitions and context • Case study research investigating automatic enrolment • Small and large enterises described • Differences between employees of small and large organisations • Differences between small and large employers • Conclusions J.E. Cairnes School of Business & Economics
Introduction • Policies should be put in place now to ensure that the aging population will not live in poverty • Defined contribution (DC) schemes are the (risky and complex) pension schemes of choice for employers • Inertia is viewed by policy makers (OECD, EU, Ireland, U.S. and U.K. as being a major impediment to saving for retirement • One policy option is to increase savings while working by requiring automatic enrolment into an occupational pension scheme J.E. Cairnes School of Business & Economics
Research question Will automatic enrolment (allowing employees to opt out) increase pension coverage and adequacy for the employees of small (<50) enterprise? J.E. Cairnes School of Business & Economics
Definitions • Inertia is the behaviour of doing nothing and allowing the current situation to prevail • Defaults are structural features of pension funds • There are several types of defaults – Automatic enrolment (AE) - employees enrolled when employed or after vesting period; member may be allowed to opt out • AE can be a feature of an occupational pension scheme or be required by government policy J.E. Cairnes School of Business & Economics
Definitions: measures of pension policy success Measures Definition Pension % of people in employment, in the labour force, scheme contributing to an occupational or personal coverage pension scheme Participation % of an organisation’s workforce contributing to rate an occupational pension Pension Income required to maintain an individual’s pre- adequacy retirement lifestyle Persistence Continued contribution to and occupational pension scheme J.E. Cairnes School of Business & Economics
Case study research investigating automatic enrolment Authors Industry Number of Length of employees observation Madrian Health care & 20,267 2 years & Shea insurance* Choi et Office 32,000 4 years al 2002, equipment 2004a; 30,000 3 year Health Choi et services* al 2004b Food products 18,000 3 years J.E. Cairnes School of Business & Economics
Case study research investigating automatic enrolment • Small number of large companies; other research on AE is also conducted in large organisations (Beshears 2010; The Vangaurd Group 2001, 2010, 2014) • Case study research suggests that defaults powerfully affect participation rates – In schemes in private companies, once enrolled, employees were unlikely to opt-out (Madrian and Shea 2001; Choi et al 2002, 2004; Beshears 2011) – Even a modest requirement for an ‘active’ decision led to lower coverage (Choi et al 2009)
Composition of Irish enterprises Number of enterprises by size Micro (<10) 171,652 Small (10-49) 14,522 Medium (50-249) 2421 Large (250+) 460 Source: Ireland. Central Statistics Office (2013)
Composition of Irish enterprise Number of employees by enterprise size Micro (<10) 329,639 Small (10-49) 276,721 Medium (50-249) 232,469 Large (250+) 384,218 Source: Ireland. Central Statistics Office (2013)
Composition of Irish enterprise Number of employees by enterprise size Micro (<10) 329,639 Small (10-49) 276,721 Medium (50-249) 232,469 About 25% of the employees of micro- and small- enterprises are members of Large (250+) 384,218 employer-sponsored pension schemes Source: Ireland. Central Statistics Office 2013
Differences between employees of small and large organisations Choi et al (2004a, p. 83) state, “Prior to automatic enrollment, Pension participation 401(k) participation rates increases with tenure ranged from 26 to 43 percent after six months of tenure at these three firms, and from 57 to 69 percent after three years of tenure.” J.E. Cairnes School of Business & Economics
Differences between employees of small and large organisations Tenure of employment “…we were able to determine is longer in large that, even after accounting for organisations the effects of union membership, fringe benefits, and earnings differences, employees of large establishments stay in their jobs longer than employees of small establishments.” (Hope and Macken 2007, p. 28) J.E. Cairnes School of Business & Economics
Differences between employees of small and large organisations Employees working in organisations with a pension scheme have longer tenure Pension participation and this “…group is also more may be related to a likely to have had a pension preference for pensions prior to the current job… suggesting that some workers seek out jobs at pension- offering firm.” (Wu and Rutledge 2014, p. 12) J.E. Cairnes School of Business & Economics
Differences between employees of small and large organisations Pension participation Madrian and Shea (2001) increases with income compare the mean starting salaries for newly hired employees at the case study organisation ($34,264) with the U.S. average ($28,248). J.E. Cairnes School of Business & Economics
Differences between employees of small and large organisations Wages by enterprise size in Ireland Small (<50) €525 Medium (50-249) €625 Large (250+) €795 Source: Ireland. Central Statistics Office (2014) .E. Cairne School of Business & Economics
Differences between employees of small and large organisations Participation rate by salary range 100% 90% Participation 80% 70% rates are high 60% but overall, but 50% lower for lower 40% 30% paid 20% employees 10% 0% Source: Madrian and Shea (2001), p. 1160
Differences between small and large employers • Madrian and Shea (2001); Choi et al (2002; 2004a) provide few details about the organisational context in which automatic enrolment was introduced – Why do the companies offer a pension? – How long have pensions been offered as a benefit? – How are pensions communicated to employees? – What accounts for differences between participation rates between organisations prior to the introduction of automatic enrolment? J.E. Cairnes School of Business & Economics
Differences between small and large employers Components of compensation by enterprise size • Large employers 35 29.74 pay more 30 • Pay mix is different 25 U.S. $ • Benefits above 18.5 20 statutory is 28% of 12.95 15 hourly wage for 10 large organisations; 4.56 3.19 5 2.21 18% for small 0 Wages & Other benefits Statutory Salary benefits <50 employees 500+ employees Source: U.S. Bureau of Labor Statistics (2014b)
Differences between small and large employers Reasons for offering pensions Why do (and other benefits) organisations offer pensions 1.It’s the right thing to do (and other 2.It promotes industrial peace benefits) to 3.Competitors are doing it their 4.It’s cost effective employees? 5.Government requires it J.E. Cairnes School of Business & Economics
Differences between small and large employers In systems where pension provision is voluntary, large 1. It’s the right thing to do employers are 2. It promotes industrial peace more likely to offer 3. Competitors are doing it pensions as a 4. It’s cost effective benefit for these 5. Government requires it reasons Small organisations are more likely to offer pensions because of legislation
Differences between small and large employers Large 1. It’s the right thing to do organisations 2. It promotes industrial peace • More resources 3. Competitors are doing it • Greater 4. It’s cost effective commitment 5. Government requires it • Specialist HR • Sophisticated benefits communications Small organisations • Less resources • Less commitment • Little or no HR • Less developed communication
Differences between small and large employers Media Type DB AVC Induction training Two-way X X Employee benefit day X X Financial Advisor X X PensionPhone X Booklet One-way/hard and X X Newsletter soft X X Pension Planet One-way on-line X X Total Reward website X Personal benefit statement One-way/hard X X Bulletin board X X
Conclusions J.E. Cairnes School of Business & Economics
Conclusion Will automatic enrolment increase pension coverage • Yes, but not by much and adequacy for the • Employees of small employees of small organisations are lower (<50) enterprise? paid; jobs are precarious • Small organisations do not have the commitment or the resources to support J.E. Cairnes School of Business & Economics
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