Are employers short-changing staff through auto-enrolment?
Some of the UK’s largest employers may have been passing the costs of automatic enrolment onto their staff through lower take-home pay, according to research.
A new study of the UK’s auto-enrolment system indicates that, accounting for lower wages, staff benefit from only half of the intended effect of mandated employer pension contributions.
The findings suggest that workers automatically enrolled into a pension fund may be losing out on an estimated £1.45bn in total take-home pay as employers pass on some of the cost of the £2.9bn in combined annual employer contributions. This was driven by larger firms in the analysis.
The research was conducted by Rachel Scarfe of the University of Stirling, Daniel Schaefer of Johannes Kepler University Linz, and Tomasz Sulka of the University of Dusseldorf.
The researchers used the Annual Survey of Hours and Earnings to analyse total compensation, including wages and pension contributions.
Staff who were automatically enrolled having not had a pension before experienced an increase in total compensation of 0.9%, the researchers found, primarily driven by the additional employer pension contributions. However, this only amounts to half of the expected impact of these contributions.
The research paper stated: “The employers recoup the other half of the additional pension contributions by reducing take-home pay.”
The authors added that no more than 47% of the increase in employer contributions benefits employees, when analysing the largest companies. Data for smaller companies was “relatively imprecise”, they said, but employees of these companies were more likely to experience a bigger benefit from employer contributions than those in larger companies.
“Our finding that extra pay declines highlights the importance of studying the potential unintended consequences of automatic enrolment beyond its direct effect on workplace pension enrolment,” they said.
The full research paper can be found here.
Meanwhile, Scarfe, Schaefer and Sulka also detailed further evidence that auto-enrolment had significantly increased pension participation, in line with previous research.
In the UK, private sector workplace pension participation was 75% in April 2021, up from 32% in 2012, according to the latest data from the Office for National Statistics.
The Pensions and Lifetime Savings Association – along with other industry commentators – has called for the next government to expand the scope of auto-enrolment by lowering the earnings and age limits currently in force. The International Monetary Fund has also supported this move, as has Sir Stephen Timms, the former chair of the Work and Pensions Select Committee.
Further reading
Trustees urge focus on pension adequacy after election (18 June 2024)
DC contributions exceed DB payments for first time (4 June 2024)
‘We need a consensus’: Sir Stephen Timms calls for higher contributions (17 May 2024)