Inertia, the behaviour of doing nothing and allowing the current situation to prevail, is reported in many empirical pension studies. A few case studies, featuring a small number of large organisations (Madrian and Shea 2001, Choi et al 2002; Beshears et al 2010) appear to have influenced the policy debate in the U.S. resulting in legislation that allows organisations to use pension scheme defaults to automatically enroll employees into pension schemes and to automatically escalate their contributions.
In the U.K., a recent policy initiative requires employers to automatically enroll employees into a pension scheme. Similar initiatives are being considered in Ireland (Coyle 2015) and the U.S (Munnell et al 2015). Although employees are allowed to opt-out, policy makers hope that inertia will prevail. If defaults are well chosen, government policy makers believe that pension coverage and adequacy will improve.
This research addresses the question: What are the risks of automatic enrolment for employees? We review the evidence concentrating on the inertia observed following automatic enrolment. In research conducted to date, most employees remain in the pension scheme and do not change either their contribution rate or the investment fund, even if those choices are inconsistent with pension adequacy. Using a bounded rationality framework, developed from the work of Kahneman (2011, 2003), we will suggest that this ‘passive’ decision making or inertia may be interpreted as the domination of intuition over reason. Employees, who bear the risk of their passive choice, are unlikely to understand those risks. We look at the implications of inertia, particularly for those unfortunate enough to face an economic downturn close to the end of their careers. We conclude that although governments, pension providers and employers recognize that defaults encourage pension scheme members to make ‘passive decisions’, there is insufficient provision made for the systematic problems that cohorts of pension scheme members are likely to encounter.