Automatic enrolment  

Small firms lag behind on pensions

Small firms lag behind on pensions

Only a quarter of employees would be saving into a pension had auto-enrolment not been introduced, IFS research has found. 

According to the study, funded by the US-based Laura and John Arnold Foundation, in the absence of auto-enrolment, just 26 per cent of employees in firms with 50 staff or less would have been saving in a workplace pension. 

Once the policy was introduced, 70 per cent of them were participating, equating to a participation increase of 44 percentage points. 

For medium and larger companies that introduced auto-enrolment during 2012/15, the rate of participation increased by 37 percentage points, according to the report. 

The research was commissioned to focus specifically on the effect auto-enrolment policy has had on employees of small businesses, which were the last group to introduce a workplace pension as part of the phased implementation.

In 2016, the minimum that had to be contributed was 2 per cent of qualifying earnings. That has since risen to 5 per cent, and from April 6, 2019 will be 8 per cent. 

According to the IFS, many of the new savers were contributing very low amounts of between 0 per cent and 2 per cent. 

But there was also a small increase (6 percentage points) in those contributing larger amounts of more than 10 per cent.

The research stated: "These findings – very large increases in pension participation and even some increases in contributions in excess of the minimum levels – are a very positive story for the pension saving of the employees working for small employers.

"Automatic enrolment has also reduced the gap in pension participation among those working for larger employers and those working for smaller employers, as it has had a smaller impact on the former than the latter."

However, the research identified a sizeable gap between large and small employers nevertheless. It found 88 per cent of those working for medium or large employers were now members of a workplace pension scheme compared with 70 per cent in firms with fewer than 30 employees. 

The report added: "This gap cannot be explained by observed differences in the types of employees working for smaller employers – for example their pay, occupation, gender or age. Nor is much of the gap explained by differences in the generosity of employer contributions.

"It therefore remains a puzzle as to why the pension participation rate amongst smaller employers is lower.

"It could be that people who do not think or worry about their retirement are particularly likely to work for smaller employers, or that smaller employers encourage employees to opt out to save on the cost of providing the pension.

"Alternatively, it could be that small employers are less effective at communicating the benefits of saving in a pension, particularly if this is the first time that they have provided one.

"Understanding this puzzle is important – a key issue for automatic enrolment is the extent to which it gets the right people into a workplace pension and the right people to opt out of being in one."