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How a small nudge is helping people save for their retirement

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In October 2012, the Government began introducing a groundbreaking new policy to automatically enrol people into workplace pension schemes.

"[This is] a new dawn for pension savers, with millions more workers being helped to save towards a pension with a contribution from their boss."

John Cridland, Director-General of the CBI

The programme of automatic enrolment into workplace pension schemes is at an early stage. However, the early results have been impressive: 1.6 million workers have been enrolled to the end of August 2013, and research among the largest employers, who enrolled their workers first, showed overall pension enrolment rates increasing from 61 to 83 per cent.

Because these figures come from the first few months of the scheme and apply only to the largest employers, the results might well change over time, as automatic enrolment is rolled out to all businesses.

What we do know, however, is that these early findings are in line with the behavioural economics literature, which shows that individuals often go with the ‘default’ option, which for millions of Britons previously meant no company pension.

The simple insight is that the pension default could be changed to overcome the behavioural biases that result in people failing to enrol. So the decision was taken to switch the default option: from one that required people to 'opt in' should they wish to join a company pension scheme, to one that allowed people to 'opt out' if they did not want one.

It is a good example of a ‘nudge’ – a way of helping people make better decisions for themselves but without closing off any options. People are still able to opt out of their pension if they wish to.

Though an apparently straightforward change, automatic enrolment has been years in the making and has only been possible due to the work of DWP officials and partner organisations. The key decisions date back to the previous administration: automatic enrolment was one of the recommendations of the Pensions Commission, chaired by Adair Turner in 2005.

After the Government accepted that recommendation, DWP officials began working out the detail of the policy, implementing a highly successful communications campaign and managing this huge change programme which continues until 2018. DWP officials have been working collaboratively throughout with delivery partners including The Pensions Regulator, who are providing guidance and tools to help employers affected by the scheme.

Even now, DWP are only one year into a six year process. So far only the largest employers have been affected. But over the life of the programme, some 1.3 million employers will be required to automatically enrol their staff.

For small and medium sized businesses, this will create challenges that do not affect larger firms (with dedicated corporate centres to support the changes) to the same extent. This will require DWP and The Pensions Regulator to provide additional support and guidance for the smaller employers, which is already being planned for.

All in all, this has been a great example of a department and its partners working over a long period of time to devise a policy, work out the necessary regulatory changes, and then support businesses to implement the changes - with the aim of changing Britain's workplace saving habits to help millions of workers to start saving for their future.

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  1. Comment by Nick Booth posted on

    I think it's an enormously sensible and practical policy - modest enough to allow industry to adapt to it but should improve the amount being saved for our old age. Is is really a nudge? I think I nudge is something which encourages people to behave differently - this gives them little option to (unless they care enough to opt out). I've always thought that nudges are things that encourage change without legislation. But I may be wrong there.

  2. Comment by Barry posted on

    I think enrolling ALL employees into a pension scheme was long overdue. I dont think we would be talking about hard working people selling their homes to fund their care costs in old age if this had been brought in when PAYE began in 1948. EVERYONE, irrespective of how few hours they work should be paying into a pension scheme with the stipulation that if you opt out there is NO ALTERNATIVE FINANCIAL SUPPORT. I pay 4 per cent of my pay into a scheme, why cant everybody else do this ?

  3. Comment by Margaret Brown posted on

    I don't think even the most generous of pension schemes will cover the cost of a care home(unless you work for a bank or some other organisation that gives disproportionately large bonuses). However, I do believe that enrolling everyone in a pension scheme can only be a benefit though I would not wish to see state provision eroded because of it unless NI was reduced to compensate.

  4. Comment by Muhammad Mayat posted on

    A nudge approach would be more along the lines of educating people on the benefits of enrolling into a pension scheme. Changing the default option is more of a paternalistic approach than a nudge approach. Libertarians would class this as intrusive. In a free society people should be given the opportunity to decide themselves if they want to pay towards a pension not defaulted into paying in with an option of opting out.

  5. Comment by Mohammed Husnat posted on

    I think it's great to have a compulsory Pension scheme to save for the future. However, it is not a 'nudge' for sure, more like a 'shove'.