While many employers offer auto-enrolment contributions above the minimum rate, the workers that benefit are seldom those most in need, according to new research from Nest Insight.
The study, composed of 30 in-depth interviews with UK employers and advisers, as well as a survey of 500 “employer pension decision-makers”, found that the auto-enrolment minimum rate is serving as a “strong default,” with four in 10 employees working for a company offering the 3 per cent minimum to all of its employees, and a further two in 10 working for a company that offered it to some workers.
There have long been calls for auto-enrolment to be expanded to more individuals, and for the minimum rate to be raised. The Association of British Insurers has said the goal should be to raise the auto-enrolment minimum to 12 per cent by 2031, split evenly between employers and employees.
The Pensions and Lifetime Savings Association has recommended a more modest increase to a 5 per cent employer/5 per cent employee split over the next decade. In September, the Work and Pensions Committee called on the government to introduce auto-enrolment reforms next spring, by which point more than five years will have elapsed since the 2017 auto-enrolment review.
Concerns have been raised, however, about the affordability of an increase, especially at a time of economic hardship. Research from Legal & General Investment Management, published in September, suggested that almost seven in 10 (69 per cent) of low earners were unable to afford even the current minimum rate of contributions.
Of the companies responding to Nest Insight’s research, 51 per cent of those offering the minimum rate to all employees said they could not afford to contribute more than the minimum rate, while more than a quarter (26 per cent) said they were prioritising base salaries.
However, the research also found a number of companies that simply treated the 3 per cent minimum as the default rate.
Nearly a third said they believed this figure to be the amount recommended by the government, while a fifth said they were going by the default settings in their payroll software or pension provider setup.
Additionally, one in 20 said they were unaware it was possible to contribute more than the 3 per cent minimum.
Just 6 per cent of employers offering more than the minimum rate said the levels set were driven by considerations with retirement adequacy.
Nest Insight’s director of research and innovation, Jo Phillips, said: “Auto-enrolment was a huge undertaking for many employers — it’s a great achievement and a good equalisation story. As we look to the future, the focus is now on how to support employees to save enough to achieve financial security in retirement.”
Contributions not targeting those ‘most in need’
Many companies — around four in 10 — offered above-minimum contribution rates to all their employees, and the same number calculated pension contributions on all earnings, rather than the minimum required band of qualifying earnings.
Nest Insight’s research showed that the higher rates were seldom going to those who would most benefit from them, however.