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.
The study found that those companies offering higher rates typically had staff who were salaried, higher earners, highly skilled and on long tenure, meaning those most benefiting from higher contribution rates are those who are already in a position of greater financial security.
Half of employees covered in the research worked for a company that matched contributions for some or all of their staff when they pay more than the minimum rate, and around a third worked for a company that offered this to all employees.
Where the company is selective, three in five said seniority was the determining factor behind contributing more than the minimum to just some employees.
Employers keen to see employees pay more
Nest Insight found that employers were pessimistic about the prospect of voluntarily increasing contribution rates, with the current economic climate, as well as inflexible legacy systems and complex pension provision being cited as barriers.
Nearly two-thirds of employers said they were unlikely to voluntarily change their approach in the next two to five years, rising to three-quarters among smaller employers.
There was, however, greater appetite for innovations that would allow employees to contribute more without any concomitant rise in employer contributions.
Two-thirds thought a salary sacrifice approach, in which tax savings could be added to employees’ contributions, was an appealing prospect, while half favoured an auto-escalation arrangement that would see employees commit to increasing pension contributions when their pay increases.
Just under half (four in 10) were intrigued by hybrid approaches, such as combining pensions with other forms of saving, such as a sidecar savings model along the lines recently trialled by Nest itself. Under these systems employees build up a pot of “liquid emergency savings” alongside their pensions.
Additionally, around a third of employers expressed openness to higher defaults with the option to opt down, where employees would begin at a higher rate but be able to choose to reduce it, rather than the usual approach that sees employees have to opt in to higher contribution rates.
Phillips continued: “Given the current economic context, it’s not surprising that employers are most interested in innovations that help their employees to contribute more without requiring higher contributions from themselves.
“This contrasts with the current policy debate around employer contributions, which focuses on rebalancing default minimum contribution rates, often calling for a move to an equal balance of 6 per cent and 6 per cent from the current 3 per cent employer and 5 per cent employee levels.”
Personal responsibility
Besides the lack of consideration for retirement adequacy modelling, Nest Insight’s research also showed a strong bias in favour of individual responsibility for retirement outcomes.
Sixty per cent of employers said employees were principally responsible for ensuring they have a financially secure retirement, compared with 20 per cent that said the government bore most responsibility, and 13 per cent saying they felt that companies themselves were chiefly responsible — figures in part explained by the expectation that most workers would have multiple jobs over their working life, minimising the impact of any individual employer’s approach.
Where employers were willing to consider doing more, a third said that equality would be a driving motive in changing their pensions approach, compared with a fifth that said boosting retirement savings among lowest earners would be their priority, and an equivalent number that said they would focus additional efforts on those most engaged with retirement saving.
“Without policy change, it’s unlikely that most employers will actively set out to re-evaluate their pension contributions approach in the near future,” Phillips explained.
“There are, however, pockets of opportunity in particular where an employer can support their employees to save more for retirement at little or no extra cost to the organisation, or where there is also a benefit for the employer such as with a salary sacrifice approach.”
Phillips also pointed to the findings regarding auto-escalation and opt-down models as avenues deserving further exploration.
“While these mechanisms move further from the ‘equal contributions’ goal of some policy recommendations, they may well be appropriate for many workers, particularly those with low or moderate incomes,” she said.
“We were also interested to see the appetite among employers for supporting shorter-term savings. Structures that support some balance for workers between higher pension contributions and some additional, more accessible saving may similarly represent an attractive way through.”
Benjamin Mercer is a senior reporter at FTAdviser's sister publication Pensions Expert
