Automatic enrolment: examining the evidence Maureen Maloney J.E. - - PowerPoint PPT Presentation

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
• rganisations
• 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

J.E. Cairnes School of Business & Economics

Will automatic enrolment (allowing employees to opt

• ut) increase pension

coverage and adequacy for the employees of small (<50) enterprise?

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
• r be required by government policy

J.E. Cairnes School of Business & Economics

Definitions: measures of pension policy success

Measures Definition Pension scheme coverage % of people in employment, in the labour force, contributing to an occupational or personal pension scheme Participation rate % of an organisation’s workforce contributing to an occupational pension Pension adequacy Income required to maintain an individual’s pre- 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 employees Length of

• bservation

Madrian & Shea Health care & insurance* 20,267 2 years Choi et al 2002, 2004a; Choi et al 2004b Office equipment 32,000 4 years Health services* 30,000 3 year 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

460 2421 14,522 171,652 Large (250+) Medium (50-249) Small (10-49) Micro (<10) Number of enterprises by size

Source: Ireland. Central Statistics Office (2013)

Composition of Irish enterprise

384,218 232,469 276,721 329,639 Large (250+) Medium (50-249) Small (10-49) Micro (<10) Number of employees by enterprise size

Source: Ireland. Central Statistics Office (2013)

Composition of Irish enterprise

384,218 232,469 276,721 329,639 Large (250+) Medium (50-249) Small (10-49) Micro (<10) Number of employees by enterprise size

Source: Ireland. Central Statistics Office 2013

About 25% of the employees of micro- and small- enterprises are members of employer-sponsored pension schemes

Differences between employees of small and large organisations

J.E. Cairnes School of Business & Economics

Pension participation increases with tenure Choi et al (2004a, p. 83) state, “Prior to automatic enrollment, 401(k) participation rates ranged from 26 to 43 percent after six months of tenure at these three firms, and from 57 to 69 percent after three years

• f tenure.”

Differences between employees of small and large organisations

J.E. Cairnes School of Business & Economics

Tenure of employment is longer in large

• rganisations

“…we were able to determine that, even after accounting for 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)

Differences between employees of small and large organisations

J.E. Cairnes School of Business & Economics

Pension participation may be related to a preference for pensions Employees working in

• rganisations with a pension

scheme have longer tenure and this “…group is also more likely to have had a pension prior to the current job… suggesting that some workers seek out jobs at pension-

• ffering firm.” (Wu and

Rutledge 2014, p. 12)

Differences between employees of small and large organisations

J.E. Cairnes School of Business & Economics

Pension participation increases with income Madrian and Shea (2001) compare the mean starting salaries for newly hired employees at the case study

• rganisation ($34,264) with

the U.S. average ($28,248).

Differences between employees of small and large organisations

.E. Cairne School of Business & Economics

€795 €625 €525 Large (250+) Medium (50-249) Small (<50) Wages by enterprise size in Ireland

Source: Ireland. Central Statistics Office (2014)

Differences between employees of small and large organisations

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Participation rate by salary range

Source: Madrian and Shea (2001), p. 1160

Participation rates are high but overall, but lower for lower paid employees

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

• f automatic enrolment?

J.E. Cairnes School of Business & Economics

Differences between small and large employers

18.5 4.56 2.21 29.74 12.95 3.19

5 10 15 20 25 30 35

Wages & Salary Other benefits Statutory benefits

U.S. $

Components of compensation by enterprise size <50 employees 500+ employees Source: U.S. Bureau of Labor Statistics (2014b)

• Large employers

pay more

• Pay mix is different
• Benefits above

statutory is 28% of hourly wage for large organisations; 18% for small

Differences between small and large employers

J.E. Cairnes School of Business & Economics

Why do

• rganisations
• ffer pensions

(and other benefits) to their employees? Reasons for offering pensions (and other benefits) 1.It’s the right thing to do 2.It promotes industrial peace 3.Competitors are doing it 4.It’s cost effective 5.Government requires it

Differences between small and large employers

• 1. It’s the right thing to do
• 2. It promotes industrial peace
• 3. Competitors are doing it
• 4. It’s cost effective
• 5. Government requires it

In systems where pension provision is voluntary, large employers are more likely to offer pensions as a benefit for these reasons Small organisations are more likely to offer pensions because

• f legislation

Differences between small and large employers

• 1. It’s the right thing to do
• 2. It promotes industrial peace
• 3. Competitors are doing it
• 4. It’s cost effective
• 5. Government requires it

Large

• rganisations
• More resources
• Greater

commitment

• 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 Employee benefit day Financial Advisor PensionPhone Two-way X X X X X X X Booklet Newsletter One-way/hard and soft X X X X Pension Planet Total Reward website One-way on-line X X X Personal benefit statement Bulletin board One-way/hard X X X X

Conclusions

J.E. Cairnes School of Business & Economics

Conclusion

J.E. Cairnes School of Business & Economics

Will automatic enrolment increase pension coverage and adequacy for the employees of small (<50) enterprise?

• Yes, but not by much
• Employees of small
• rganisations are lower

paid; jobs are precarious

• Small organisations do

not have the commitment

• r the resources to

support