Research and analysis

Summary: Workplace pensions and Automatic Enrolment: employers’ perspectives 2022

Updated 27 October 2022

Overview

Automatic Enrolment (AE) was introduced under the Pensions Act 2008, stipulating every employer in the UK must automatically enrol certain employees, currently those aged between 22 and State Pension age (SPa) and earning over £10,000 a year, into a workplace pension scheme and contribute towards it. Employees then have the option to leave the scheme.

AE was introduced over a 5-and-a-half-year period, from October 2012 to February 2018. Between October 2012 and June 2015, AE became mandatory for large and medium sized employers. Between June 2015 and May 2017, this was extended to small and micro employers.

Once eligible employees are enrolled, employers must contribute to the pension savings. Until 5 April 2018, the minimum contribution rate was set at 2% of the qualifying earnings^{[footnote 1]} of each automatically enrolled employee, with at least 1% provided by the employer.

The rates increased to a total of 5% in April 2018, with at least 2% contributed by the employer. On 6 April 2019, contribution rates rose to a total of 8%, with at least 3% contributed by the employer.

The primary objectives of this research were to understand employers’ views and behaviours regarding AE, to explore the role employers play in supporting their employees to save into their pension or emergency savings, to understand how employers view pensions within their overall benefits package and why they may be going above the AE minima.

As well as these specific research aims, the research was used as an opportunity to further explore the factors that influence whether and how employers choose their pension scheme, how the consideration of costs and value for members come into this, explore employers’ awareness of Environmental, Social and Governance (ESG) investing and Collective Defined Contribution schemes (CDCs), and employers’ views on consolidation options for small pension pots.

The research was also commissioned to enable an understanding of employers’ views and experiences of AE, and their pension choices and behaviours following the COVID pandemic.

Research context

This research will be used to inform decisions regarding employers’ current contribution rates and the coverage of AE. This research was also conducted to improve the Department for Work and Pensions (DWP) evidence base on employee pension engagement, costs and charges standardisation, small pension pots consolidation, value for members and the expansion of CDCs.

Main findings

1. Most employers perceived Automatic Enrolment (AE) as a good policy, and were supportive of its objectives and aims. When considering potential AE changes (in line with 2017 Review Measures)^{[footnote 2]}, many employers saw no issues with paying higher contributions.

2. Key themes and considerations regarding AE duties included financial and administrative cost considerations, employee engagement and questions around responsibility.

3. Employers mainly considered time and financial resource, the reputation and security of a scheme, value for members and advice or recommendations from outside bodies when making workplace pension decisions.

4. There was variation across employers in their responses to most areas of the research. Where particular characteristics have been referenced (i.e. size, sector), the evidence showed there were common views shared within these groups.

5. Employer pension engagement was often influenced by the amount of knowledge or resource they had. This engagement impacted on how invested (how much resource they allocated to pension provision) or involved (how engaged they were with their pension provision) employers appeared to be in their pension provision.

6. Engaged employers took a more ‘paternalistic’ approach whereby employees are ‘looked after’, meaning they typically provided wider ranging support, and considered the impact of decisions on employees. These were often larger employers, or from more ‘professional’^{[footnote 3]} sectors.

7. Such employers were distinct from less engaged employers who saw pension saving as the employee’s responsibility. This meant they were less likely to actively consider their options regarding workplace pensions, nor the impact of decisions on employees.

8. Alternatively, some decisions were not made because of the employers’ attitude but because of a lack of employee engagement or appetite for their pension, or high employee turnover.

9. Employers rarely switched their pension provider as they felt it was too difficult a process. The few who had, cited dissatisfaction with their provider’s customer service as the main reason. Most employers considered value for members to be a priority when considering switching schemes.

10. Considerations regarding small pots consolidation options included concerns around who the administrative responsibility would fall on, i.e. themselves or the government, time costs and how consolidation may impact previous pots.

11. Employers believed a lack of pension saving habits were influenced by affordability, short termism (the age of employees or distance from retirement) and employee lack of knowledge.

12. When asked about Environmental, Social and Governance (ESG) investments, most employers said they’d offer ESG schemes as an optional scheme rather than the default, due to a concern about the risk that may come with poor investment returns.

13. Most employers, when asked, were not aware of Collective Defined Contribution schemes (CDCs).

14. The current economic recovery from the pandemic, rise in the cost of living and the latest National Insurance (NI) increase (reversed at time of publication) can present a challenge to pensions engagement and contributions. However, employers are still able to meet the requirements of AE and most were to do so even with greater pension costs.

Methodology

This research was conducted in-house at DWP by the project team. Fieldwork was conducted from January 2022 to March 2022, and consisted of 59 in-depth telephone interviews with employers across a range of sizes, sectors and regions in Great Britain (GB).

Employers contact details were provided by The Pension Regulator (TPR). Employers were subsequently contacted via email, and asked if they would like to take part in the research. Employers that volunteered were scheduled for a telephone interview.

The notes from these interviews underwent a process of thematic analysis^{[footnote 4]}. The themes identified during this process determined the findings in this report.

Findings explained

Finding 1

When it came to the objectives of AE, most employers perceived AE as a good policy, and were supportive of the objectives and aims of the policy. They were also comfortable with their duties, and saw no barriers to complying with any future changes to AE.

Finding 2

Some employers were less concerned with AE as a policy, and more so how easy they found it to meet the requirements of AE as an employer. Financial costs and administrative costs, such as time and resource, were the main costs associated with providing a workplace pension. Many employers, primarily large ones, only conceptualised financial and admin costs when initially setting their schemes up, and then saw their pension provision as straightforward and just a standard running cost.

For other employers, pensions were seen as costly in time and/or resource, often influenced by the employer’s knowledge of pensions or the associated processes, and their complexity. Some employers, who saw pensions as costly, questioned whether their employee’s pensions should be their responsibility.

Finding 3

There was a wide range of employer views and behaviours associated with AE and workplace pensions to account for when considering policy changes. This research attempted to draw distinctions from different sized employers and those from different sectors, and found that often even within these categories, views and experiences differed.

Finding 4

Some employers saw their AE duties as easy and straightforward. These employers often had more resource to understand and administer pensions, resulting in more positive views towards AE.

Other employers saw pensions as a good thing on a personal level, but AEs impact on them as an employer (i.e. the costs and burdens associated with providing a workplace pension) influenced their views on AE itself. This meant they tended to be less engaged with choices such as enrolment, raising awareness and choosing their pension schemes.

Findings 5 and 6

This research suggests there is a contrast between proactive employers (often larger in size) who view and use pensions as a benefit, and those employers who see pensions as an obligation to fulfil. Proactive employers tended to take a more ‘paternalistic’ approach, where their decision-making processes regarding their workplace pension were impacted by their desire to ‘look after’ employees. This is evident in their approaches to contributions, employee engagement and even enrolment decisions.

Finding 7

Employers believed that employee pension engagement tends to vary according to employee’s characteristics, but overall was perceived as fairly low by many employers. For these employers, they saw their employees’ attitudes ranging from no awareness of where or what their pension is, to awareness but little engagement. This lack of engagement, along with high employee turnover, meant that often employers did not see pensions as a priority, as they believed their employees didn’t.

Finding 8

When making decisions employers considered the resource burden on their company. Though financial costs were important, employers were more concerned with the time cost burdens associated with administrative tasks. This concern was prevalent across the choosing/switching and small pots research areas, suggesting it is an important factor in the employer decision making processes. Following this, the scheme’s value for members was the second most considered factor in their decision-making process.

Employers considered value as investment returns, ease of communication and support from the pension provider, i.e., customer support, and the scheme’s flexibility. Although value for members was most prominent response to the choosing/switching questions, it was also considered when contemplating new or changed initiatives, such as small pots consolidation and ESG investing. Here, employers predominately considered the risk to investment returns, however they also considered the ease of use or sustainability of the initiatives. Throughout the advice of intermediaries was relied on by employers in most research areas.

Finding 9

Few employers had switched as they perceived switching to be difficult and would only do so if dissatisfied with the scheme’s customer service, their flexibility or poor investment performance. When an employer had switched, their positive experience relied heavily on good customer service. This was often linked to reduced time costs as employers highly rated the new pension provider handling the admin burden.

Finding 10

Value for members was considered to include investment performance, customer service and flexibility from the pension provider. Most employers considered value for members to be a priority and would highlight this through their actions and attitudes. Some employers prioritised time and financial costs but balanced these factors with value for members where they could. Very few employers did not consider value for members to be a priority at all.

Finding 11

Due to AE being extended to lower earners and people who move jobs frequently, there has been a rise in the number of deferred pension pots (i.e., pots that are no longer being paid into). These pots often contain a small amount of money. Employers were asked their views on 2 consolidation options for small, deferred pots.

Option 1

Deferred pots are automatically brought together by a large, government-approved scheme/pension provider.

Option 2

The pots follow the employee to their new employer and are added to that pension scheme. Of the 2 consolidation options, most employers expressed more favourable views towards option 2, although they did feel employees should have the right to choose if they wanted to consolidate or not. Employers also expressed concerns on who would be responsible for the burden of setting up and regulating the admin for either consolidation option.

Finding 12

Employers perceived affordability, i.e. the cost of living and the economic impacts of the pandemic, as a prominent reason for why employees stopped saving into their pensions after a short period. Employers also considered short termism (a perceived short-sighted outlook on the employee’s future) to particularly impact younger employees; employers suggested young employees wanting their net pay immediately or not being used to having to pay into a pension led to their stopping saving.

Employers also considered employee lack of knowledge to be a reason, believing that some employees (mainly short stay and migrant workers) were not aware they were in a pension until the opt out window was over, and would then stop saving once the employee had realised.

Finding 13

Environmental, Social and Governance (ESG) investing is an investment approach that considers how companies impact the environment and society, as well as how they are governed. Most employers said they would offer ESG as an option rather than the default as employers felt investment choice should be given to the employees, and it was not their right to impose their beliefs on the employees. Employers also responded with a concern about taking responsibility for risk that could come with investment options with poor returns. Employers who said they would make ESG the default typically aligned their ethos with their pension provider, and stated they were concerned with their social responsibility.

Finding 14

Collective Defined Contribution (CDC) schemes are a pension scheme in which the employer pays a fixed rate of contributions, like Defined Contribution schemes. However, in a CDC scheme the employees receive pensions with variable increases through cross funding within the scheme between members. The defined benefit is not guaranteed and there is no funding obligation to the employer.^{[footnote 5]} This research found awareness of CDC schemes was low amongst all employers. The few employers who were aware had often only heard of the schemes in passing, and felt they were unlikely to consider using CDC schemes due to a variety of reasons including time costs, the security of the scheme or the suitability of the scheme.

Finding 15

Both employer and employee pension engagement and contributions seem to be impacted by the economic recovery from the pandemic, rise in the cost of living and the latest National Insurance (NI) increase (reversed at time of publication). Employers articulate having more limited cash-flow for themselves, and referenced employees being more focussed on take-home pay, influencing their pension saving.

1. Qualifying earnings are the minimum basis for calculating AE contributions for employees. They are all the earnings between a lower (LEL) and upper limit (UEL) that is set by the government and reviewed each year. ↩

2. In 2017 a review of AE was conducted in order to consider the success of AE, and explore ways to develop it further. This review outlined 3 key strategic problems to improve the future development of AE. These included current saving levels, issues with self-employed saving and engagement with saving. ‘2017 AE Review Measures’ refers to potential next steps as outlined by the review. ↩

3. For the purpose of this report, the term ‘professional sector’ refers to a broad grouping of sectors of which provide services of a professional nature i.e. financial and insurance activities, administrative and support services. ↩

4. Thematic analysis is a term used for a type of qualitative analysis used to identify themes within the data. ↩

5. More information in the Collective Defined Contribution (CDC) Schemes parliamentary paper. ↩