Nest Insight is delighted to have commenced a new piece of work funded by abrdn Financial Fairness Trust, exploring opportunities for innovation and voluntary increases in employer contributions to pensions and other financial workplace benefits.
A lever for improving retirement outcomes for millions of low to moderate earners in the UK?
UK pension regulations impose minimum contributions to go into an individual’s pension via payroll if they are an eligible employee. Yet for many people these are set too low to ensure adequate incomes in retirement. Engagement techniques and educational interventions have, for the most part, proved ineffective at encouraging individuals to contribute more. Policy debate has therefore increasingly focused on increases to statutory minimum contributions.
The role of voluntary additional contributions from the employer is less examined. These contributions can directly boost savings, may incentivise additional member contributions, and could support broader financial wellbeing goals. Some employers already contribute more than the legal minimum for all employees, for those willing to increase their own contributions or for certain groups of employees. Encouraging take-up of matches, and encouraging more employers to increase their contributions or to optimise their contributions structure in other ways, may both be paths to greater savings adequacy.
However, we also know that there are significant barriers to change in employer pension contributions structures. Clearly, the cost of contributions is a significant factor. Employers, as well as individuals, have been impacted by the pandemic – many financially, but also in terms of headspace and bandwidth for change. How much of a lever for improving retirement outcomes could this be? Is there an opportunity here, or are the contextual and structural barriers to change too great to make this potential a reality?
A more rounded picture: filling in the gaps in our understanding
We don’t currently have a very rounded or detailed view of the current employer contributions landscape from existing data. The scale of additional employer contributions on offer and, in particular, the extent of actual take-up is currently unclear. There is also a lack of evidence and understanding about the attitudes of employers and the dynamics at play in their decision-making.
Nest Insight wants to address these gaps in understanding, looking across a broad range of employer types, to answer the following kinds of questions:
- How many of the 10 million workers brought into retirement saving though auto enrolment are offered additional employer contributions in some form; what are the levels of additional contributions; how many workers have taken them up and how many are ‘leaving money on the table’ through matches they are not accessing?
- How are pension contribution levels decided? What are employers’ motivations for going beyond the minimum? Under what conditions would employers consider increasing contributions?
- What alternative design options might make more effective use of limited employer budgets, in terms of potential end benefits to employees? What appetite is there to adopt these design options? How feasible would change be?
Early learnings suggest many challenges but some pockets of opportunity
We’re part-way through the early stages of the project, reviewing existing evidence and talking to employers and their advisors. At this stage we are starting to identify some hypotheses to explore further, including:
- Auto enrolment minimums are the dominant model, particularly for small and medium employers (SMEs), but there is a wide diversity in models and structures adopted by employers who do more than the minimum for some or all of their employees.
- The cost of pension contributions is weighed against the return on investment from other aspects of reward by employers. Pension contributions may be considered less motivating to employees and in recruitment than more immediate benefits such as pay rises or bonuses. Competition for employees in some sectors as a result of Brexit and the pandemic and the current cost of living crisis are intensifying this shorter-term focus.
- Few employers consider retirement outcomes or adequacy in setting pension contribution levels. However, when employers move from a defined benefit to a defined contribution scheme this is more likely to be a factor in decision making.
- Several different structural and contextual factors ‘lock in’ the models that employers have in place today, including the limitations of payroll systems and other administration costs, contractual and other obligations, complexity of legacy and multiple structures, affordability and budgeting approaches, and sector norms and benchmarks.
- Although the ecosystem around contributions can be a ‘brake’ on change, there are also opportunities for it to be an ‘accelerator’. For example, payroll software used by SMEs could be a route to suggesting different structures and approaches.
- Employers are increasingly considering the equality of approaches across their workforce. Established contribution models that favour more senior employees or those with longer tenure are starting to be questioned.
We’re looking forward to quantifying some of what we’re hearing in a nationally representative employer survey over the next couple of months and to sharing the full learnings from this research in the summer.
Jo Phillips, Director of Research and Innovation