Pensions minister Guy Opperman has hailed auto-enrolment an ‘extraordinary success’ following a hike in small business employees saving into a pension.
Research from the Institute for Fiscal Studies, published on 26 March, found that 70 per cent of workers employed by small businesses (of 2 to 29 employees) were saving into a workplace pension as of April 2016.
This compared with just 26 per cent before auto-enrolment was introduced in 2012, according to the research.
Mr Opperman, minister for pensions and financial inclusion at the Department for Work and Pensions, said: "Automatic enrolment has been an extraordinary success, transforming pension saving and improving the retirement prospects of more than 10 million workers already.
"As this report shows, small business owners all over the UK have made this possible, with participation rates estimated to have been increased from 26 per cent to 70 per cent due to automatic enrolment.
"This radical reform is creating a new relationship between the employee and their employer."
The DWP said the regulation was such a success, Germany, Ireland and Poland were looking to adopt the same policy.
IFS’ research had used the ONS’ 2017 annual survey of hours and earnings, which included 180,000 respondents, to examine the effect of automatic enrolment.
It looked specifically at data from April 2016, the point at which some small employers (those with fewer than 30 employees) had to introduce automatic enrolment.
The research found much of the increase in pension participation occurred at different contribution rates.
Most of the increase (28 percentage points) came from employees with low minimum contributions of 2 per cent, while 6 percentage points came from employees making a pension contribution of at least 10 per cent of salary.
At the time the data was collected, the minimum that had to be contributed was 2 per cent of qualifying earnings. That has now risen to 5 per cent and will increase again next week to 8 per cent.
But the research also showed a sizeable gap between employees of large and small businesses participating in a workplace pension.
Under automatic enrolment, 88 per cent of employees of medium or large employers are members of a workplace pension, compared with 70 per cent of those working for an employer with fewer than 30 employees.
IFS stated the gap remained a puzzle and could not be explained by differences in the types of employees working for smaller employers, for example their pay, occupation, gender or age.
Nor was the gap explained by differences in the generosity of employer contributions.
The IFS stated: "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. This is the subject of ongoing research at the IFS. But overall the evidence so far on automatic enrolment is positive."
The IFS added improvements to auto enrolment should be made sooner than the government’s current proposed date of ‘mid-2020s’, and should include extending the band of earnings to which minimum contributions have to apply or increasing the minimum rates of contributions.
Angela Maher, managing director of Acumen Financial Partnership, said: "Auto enrolment has been hugely positive for pension provision.
"It’s also good for society and the country as a whole, as it encourages people to take responsibility for their future. It makes little sense to me to opt out of auto enrolment as you are effectively turning your back on a pay rise.
"However, you have to give people some degree of autonomy in how they save for retirement. Increasing the minimum contributions further may start to feel like a tax and could result in more people opting out, which would defeat the whole purpose."
