Automatic pension enrolment – a step in the right direction?

By 2018 all employers must introduce automatic pensions enrolment. Kate Downer of RS Consulting researched the experiences of early adopters and found more employees saving for retirement.

Picture Credit: Jacek.NL

Millions of us are simply not saving enough for our retirement. The government’s aim in introducing automatic enrolment is to address this serious issue, one of the greatest challenges facing the UK pensions system.

As its name suggests, automatic enrolment requires employers to enrol certain groups of workers into a workplace pension scheme automatically: the worker can then decide to opt out if he or she wishes.

The first organisations introduced auto-enrolment in 2012, and by February 2018 all employers in the UK will have gone live. Once fully implemented, automatic enrolment aims to transform our retirement saving culture, increasing the number of people saving and the amount being saved.

Our evaluation for the Department for Work and Pensions looks at the experiences of 50 employers who introduced automatic enrolment during 2014, as well as those of their employees. We set out to understand the impact on these employers as they went through the planning and implementation process, and in particular, to measure opt-out rates. We also wanted to understand workers’ experiences: what was their reaction to being enrolled, and what motivated those who chose to opt out?

The 50 employers who participated in this research employed between 62 and 499 people, and between them they represented 7,900 workers. The overall opt out rate was 12 per cent in the first month after automatic enrolment. Taking into account opt outs, automatic enrolment increased the scheme participation rate across our 50 employers from 43 per cent to 73 per cent.

Opt out rates were highest among the over fifties: often around twice as high as among other age groups. Also, part-time workers were more likely to opt out than those working full-time.

Nearly all the 100 workers we interviewed agreed in principle that people have some personal responsibility for supporting themselves financially in retirement. It was evident, though, from our conversations that some were relying on provision that would come from their family or the state – and that most did not know how much the state pension was currently worth.

The three most commonly-cited reasons were:

  • People’s concern that they could not afford to contribute to the pension scheme. Those who gave this reason were not necessarily within the lowest income brackets: their personal annual income could be as high as £30,000 before tax.
  • Some already had something in place that they planned to use to fund their retirement: once they had made some provision for retirement income, they had resolved the issue, in their view.
  • Thirdly, some felt that they did not have sufficient time to save into a pension before they reached retirement, to make ‘staying in’ worthwhile. Most who cited this as a reason to opt out were aged over 50.

Finally, we identified a number of key learnings for the thousands of small and medium-sized enterprises that must now implement automatic enrolment:

Begin preparations at least six months in advance of the staging date

Employers often found that preparations had taken longer than they originally thought. They typically recommended that other employers should begin to review what they needed to do six to nine months beforehand.

Remember that more preparation will be required in the final month prior to staging

Employers found that they could not assess their workers’ eligibility for enrolment until they knew their working hours and salary for the first month after staging. If an employer had many workers with variable earnings, on different payrolls or with a variety of contracts, they often found that a lot of work was necessary to assess eligibility.

Involve someone who is familiar with running your payroll from an early stage

Some employers found the process of assessing workers, calculating contributions and transferring these to the pension provider to be complex and time-intensive. These tasks were, however, much easier if the person leading implementation was closely involved with the payroll. Where the organisation outsourced their payroll, they usually found it helpful to consult about automatic enrolment with their provider.

Communicate early, communicate widely

Some employers began communicating with their workers at a relatively early stage, and in a more general way, before getting into the specific details about what each individual’s experience would entail. They recommended drip-feeding communications like this gradually, to encourage workers to engage with the potentially dry and complicated subject matter. Some employers also felt that using a variety of media helped to reach out to more workers.

Not all advice is expensive

Those employers who could afford to hire a professional adviser generally found their input very useful. Those who could not often found that other sources of information and advice were available for little or no financial outlay. Some were able to use existing relationships with someone with experience in financial or employment matters. Others recommended free seminars by HR and employment consultancies.

Department for Work and Pensions, Research Report No 899, Automatic enrolment: Qualitative research with employers staging in 2014. By Andrew Wood, Head of Public Policy Research, Kate Downer, Research Director, Dr. Louise Amantani, Senior Research Consultant, and Chloe Gooders, Research Consultant.