Access to above-minimum AE contributions 'uneven'; employers open to innovation

Auto-enrolment (AE) has widened access to pension savings, yet access to above-minimum contributions is unevenly distributed, with higher contributions targeted at those who are, arguably, least in need of support, according to analysis from Nest Insight.

The research found that just four in 10 employees work for an organisation offering more than the 3 per cent minimum employer contribution, while 4 in 10 work for an employer that calculates contributions on all earnings, not just the minimum required band.

Over half (51 per cent) of those employers who offered only the minimum said this was because they couldn't afford more, while 26 per cent said it was because they are prioritising putting money into base salaries.

However, the analysis suggested that access to higher-than-minimum contributions is not evenly distributed, revealing that around half of large employers offered more than the minimum, compared to a quarter of small organisations.

The analysis also found that employers are more likely to offer above-minimum contributions if they predominantly have employees that are salaried, higher earners, or long-tenure.

In addition to this, current approaches were found to often direct any higher-than-minimum employer contributions to employees who can afford to contribute more, are likely to have greater financial security and be more financially confident:

Indeed, three out of five employers cited seniority as the top factor behind contributing more than the minimum to some employees’ pensions.

In contrast, few employers actively considered employee retirement adequacy when setting their pension contribution levels, with only 6 per cent of those who offer more than the minimum stating that this decision was driven by modelling retirement outcomes or considering salary replacement rates for their employees.

Minimum contribution levels were instead seen as a strong default, as nearly one in three employers said they provide the minimum contribution because they believe it is the amount recommended by government, while one in 20 did not even know it was possible for an employer to contribute more than 3 per cent.

The majority (62 per cent) of employers also confirmed that their organisation is unlikely are to implement a different approach to pensions contributions in the next two to five years, rising to three quarters (74 per cent) of smaller employers.

Despite this, the research found evidence that there is some appetite for evolution and improvement and a growing focus on more equal structures, as well as those that target support at those most in need.

Indeed, around one in three employers said equality would be a top priority if they were to implement a new pension contributions approach, while around one in five said that boosting retirement saving for those on the lowest incomes would be a top priority.

Challenges remain though, as the report found that the current challenging economic context, the inflexibility of legacy systems and the complexity of some employers’ pension provision all act as strong barriers, even when employers would like to make changes.

However, it found that there are particular "pockets of opportunity" in situations where an employer can support their employees to save more for retirement at little or no extra cost, or where there is also a benefit for the employer, such as with a salary sacrifice approach.

In particular, two out of three thought a salary sacrifice approach was appealing in which tax savings could potentially be added to pension contributions to boost the employee’s retirement saving.

Meanwhile around half of employers liked the idea of an auto escalation approach in which an employee can commit now to automatically increasing their pension contribution in future, for example when they get a pay rise or after a year.

A further four in 10 employers thought a hybrid approach held promise, while around one in three thought that a higher default with the option to opt-down was an attractive option.

Nest Insight director of research and innovation, Jo Phillips, commented: “AE was a huge undertaking for many employers. It’s a great achievement and a good equalisation story.

"As we look to the future, the focus is now on how to support employees to save enough to achieve financial security in retirement.

“Without policy change, it’s unlikely that most employers will actively set out to re-evaluate their pension contributions approach in the near future.

“There are, however, pockets of opportunity, in particular where an employer can support their employees to save more for retirement at little or no extra cost to the organisation, or where there is also a benefit for the employer such as with a salary sacrifice approach.

“While these mechanisms move further from the ‘equal contributions’ goal of some policy recommendations, they may well be appropriate for many workers, particularly those with low or moderate incomes.

“We were also interested to see the appetite among employers for supporting shorter-term savings. Structures that support some balance for workers between higher pension contributions and some additional more accessible saving may similarly represent an attractive way through.”

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