The UK’s auto enrolment programme recently reached an incredible milestone. Thanks to the initiative, and the 1.4 million UK employers who enrolled them, 10 million people are now newly saving, or saving more, for their retirement. Since 2012, before auto enrolment was introduced,
we’ve seen workplace pension participation rise from just 55% of eligible employees to over 84% today.1
When creating the auto enrolment programme, the government decided to adopt a phased approach to minimum contribution levels to help smooth the experience of savers and employers. They also looked to the United States, and the successes of the ‘Save More Tomorrow’ approach 2 – a form of auto-escalation on offer in many pension schemes. The first phased contribution increase took place in April 2018, and the second increase is due in April this year, taking total contributions from 2% at the start, to 5% today, and then to 8% in the coming month.
The key question raised by this phased approach to contributions was whether it would challenge the status quo, leading existing savers to stop contributing and causing new joiners to opt out at a higher rate. Since then, we’ve seen that the April 2018 increase had little to no impact on cessation and opt-out rates, and as we approach the next rise we’re optimistic that we’ll see a very similar outcome.
The low impact we’ve seen so far is definitely to be celebrated. But, if we move past the headline opt-out and cessation figures, what can further analysis tell us about how phasing is affecting people’s broader financial lives, attitudes and behaviours? In our latest research project, we surveyed NEST members before and after the first increase to gain insights into how peoples’ financial circumstances are developing over time and shed light on how savers may respond to the forthcoming increase. The auto enrolment experience over time: Understanding the real impact of contribution increases on behaviours and attitudes (PDF), reveals many positive signs. Key findings include:
- Very few members (1 in 20) think too much of their income goes into their pension.
- After the increase, over a quarter of members (28 per cent) thought about increasing their contributions further.
- Around half of NEST members (51 per cent) didn’t notice an increase in their pension contributions.
- After the rise, there was a slight overall increase in confidence in being able to provide for retirement, and members aged over 60 became more likely to consider their pension as their main source of income in retirement.
- There was no evidence to suggest that there had been a negative impact on levels of overall debt or non-pension saving behaviours.
This certainly reinforces just how successful auto enrolment has been so far. However, as we look ahead to the future, it also highlights some potential flipsides to the power of inertia that we need to be mindful of. In our surveys, most members told us that they check their payslips, but about half didn’t notice a change in the amount they’re contributing. This low level of awareness suggests it’s unlikely that people are questioning whether they’re contributing enough. For those on lower and moderate incomes, who might otherwise expect to rely solely on the State Pension, auto enrolment is likely to provide a very meaningful uplift in their retirement income and quality of life in retirement. However, some people may need to take further action to achieve the retirement outcome they’re hoping for. Getting people to engage with retirement outcomes rather than inputs is an important first step. And, for those who do express an interest in increasing their contributions, how can we engage these savers and make it really easy for them to do so? As our research highlights, a quarter of our members said that they’d thought about contributing more, but those thoughts didn’t turn into actions.
In this research we also saw little, if any, evidence to suggest that savers are funding increased pension contributions through debt. Instead, those that did experience an impact on take home pay tended to moderate their consumption. Our work did however highlight three groups to monitor as we move forwards. These include people who are more likely to be over-indebted or struggling to save outside of their pension. We found for example that 8 per cent of NEST members reported themselves to be over-indebted in both surveys, and strikingly these people were also more likely to have become unaware of how much they’re paying into their pension pot between the survey waves (22% compared to a NEST average of 17%). This is something to watch, and we intend to explore this further during the coming year.
Looking ahead to the next rise this April, there are many reasons to believe there will be a similarly low impact on cessations and opt-outs. Like others, we will watch with interest as the next increase takes effect, and we’ll look to see if the trends emerging from this research continue.
Will Sandbrook, Executive Director of NEST Insight
2 Thaler, R.H and Benartzi, S. (2004) Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings. United States: The University of Chicago Press.