Automatic enrolment ‘nudge’ boosts pension saving by £2.5bn

Automatic enrolment has increased pension saving by £2.5bn per year by April 2015 following a substantial rise in pension membership, particularly amongst lower income groups, according to research from the Institute for Fiscal Studies (IFS)

The institute analysed data on almost half a million jobs from April 2011 to April 2015 to look at how contributions to workplace pensions by private sector employers and their employees have been affected by automatic enrolment.

It found that automatic enrolment increased pension participation among those eligible by 37%, so that by April 2015, 88% of these private sector employees were members of a workplace pension scheme. In contrast, prior to automatic enrolment around half of these employees were members of a workplace pension and membership had been falling over time.

In 2012 there were around 5.4m private sector employees who were a member of a workplace pension. By 2015 this had increased to 10m. Of this increase of 4.6m, IFS estimates suggest 4.4m was the result of automatic enrolment. At this point one-quarter of eligible private sector employees (3.4m) worked for an employer that was still to be brought into the scope of the policy.

Automatic enrolment boosted pension coverage by the most among those aged 22 to 29, those earning between £10,000 and £17,000 per year, and those who have been with their current employer for less than a year.

The IFS says that for each of these groups, for whom pre-reform coverage rates were particularly low, automatic enrolment has increased membership rates in workplace pensions by over 50 percentage points. In 2015 coverage among all of these groups had risen to over 80%.

Most of those brought into workplace pensions as a result of automatic enrolment have, so far, only low levels of contributions. The minimum contributions to pensions under automatic enrolment are 2% of earnings between £5,824 and £42,385 (in 2015–16), with at least 1% coming from the employer. There has been a 24% increase in the proportion of eligible employees who have contributions around this level.

However, automatic enrolment has also increased the numbers of employees placing considerably more than the current minimum amount into a workplace pension. The proportion placing 5% or more of their total earnings into a workplace pension has increased by 7%.

In addition, automatic enrolment has more than doubled membership of workplace pensions among those not directly targeted by the policy. Those not eligible are employees aged under 22, employees over the state pension age, those earning less than £10,000 per year, and those who just joined their employer.

Automatic enrolment increased pension membership rates across these groups by 18%, compared to a baseline of 15% prior to the reform. The effect was a particularly large 28 percentage points among those earning under £10,000 per year (compared to a baseline of 18% prior to the reform).

IFS says its estimates suggest that in April 2015 a total of £2.5bn a year more was saved in workplace pensions as a result of automatic enrolment. Researchers predict this amount is highly likely to increase significantly over the next few years as more employers are brought into the scope of automatic enrolment and as the minimum contributions increases from 2% to 8% of qualifying earnings.

Jonathan Cribb, a senior research economist at the IFS, and an author of the report said: ‘The story of automatic enrolment is certainly a case of so far so good. A key issue is whether those brought into workplace pensions at low contribution rates will remain in when minimum contribution rates start rising.’

The IFS paper, What happens when employers are required to nudge? Automatic enrolment and pension saving in the UK is here.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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