Auto enrolment and debt
Most people who’ve been automatically enrolled haven’t opted out, so their employers are deducting money from each payslip to put into an illiquid pension pot. And that’s a good thing. The implicit assumption behind the auto enrolment policy is that people are covering the cost of these deductions by slightly reducing their spending. But what if some of them are taking on more debt to compensate for the cost of these contributions? What would the effect of that be on their wider financial situation? Up to now, there’s been no way to find out whether this is happening.
We’ve been working with the University of Nottingham and Experian to generate a new dataset that matches up people’s pension and credit records, creating a unique opportunity to explore the interaction between auto enrolment and other areas of people’s finances, while preserving people’s data privacy.
Using this data set, we worked with leading researchers from Harvard, Nottingham, and Yale universities, as well as Warwick Business School at the University of Warwick, to examine the effects of auto enrolment on the financial experiences of the hundreds of thousands of people who were enrolled into Nest between 2015 and 2017. During this time, auto enrolment was being rolled out at workplaces with fewer than 30 workers, and the default minimum contribution rate was 2% of income, with the employee usually paying 1%. Because the timing of the roll-out was randomised at the employer level, we were able to isolate the effect of auto enrolment from other factors at the time.
The research was made possible with the support of the BlackRock Foundation and the Money and Pensions Service, and enabled by Nest Insight’s emergency savings programme that was also supported by JPMorgan Chase.
Key findings
As well as increasing people’s pension savings—average savings in Nest were £32 per month, and estimated total pension savings were £38— the research found that after being automatically enrolled people’s credit scores showed a positive increase over time and their likelihood of defaulting on debts decreased. Interestingly, people were also slightly more likely to take out a mortgage, suggesting perhaps that being automatically enrolled may have encouraged some to take another step on their financial journeys.
The research also found that during the early stages of the auto enrolment rollout, there was an average increase of £7 per month in existing overdrafts or loans. Whilst this may have been a short-term effect as people adjusted to the cost of their pension contributions, the evidence does suggest a need for nuance in any consideration of raising auto enrolment minimum contribution levels in the future.
You can read more about our findings in this blog post: How much are UK workers really saving as a result of pensions auto enrolment?
