Employer pension contributions in the UK

• Context
• The study
• Key findings
• Points to consider

Context

Regulation of pensions in the UK requires employers to enrol eligible workers into a pension scheme at a minimum mandatory contribution level of 8% of qualifying earnings, with at least 3% coming from employer contributions. Auto-enrolment into workplace pension schemes, with the option of opt-out, was introduced in the UK in 2012 and has proved to be successful in ensuring most UK employees are saving for retirement.

For many workers, however, and especially lower-income workers, the minimum contribution levels are too low to ensure an adequate income in retirement. Employers can voluntary choose to set higher contribution levels or increase their contributions in other ways, for example, by matching employees’ contributions. However, there are significant barriers to employers doing so and, to date, it has been difficult to get a clear view of the employer contributions landscape.

The study

This mixed-methods study was funded by abrdn Financial Fairness Trust and undertaken by Nest Insight in 2021 and 2022. Its aim was to explore the existing employer pension contribution landscape in the UK and how innovation in the sector could support employees’ financial security in retirement better in the future.

A literature review, expert interviews and analysis of Nest administrative data were undertaken to review the landscape of employer pension contributions. Qualitative in-depth interviews were undertaken online with 30 employers, advisors and industry bodies. Finally, quantitative data were collected via an online survey of 500 pensions decision-makers at UK employers (weighted to be representative of employers nationally based on their contribution to employment, industry and region).

Key findings

• Employer contribution levels: 6 in 10 employees work for an employer which offers the minimum 3% employer contribution to all their employees (39%) or to some of their employees (19%).
  • 51% of large employers (with 250+ employees) offer more than the minimum, compared with 25% of small employers.
  • Employers are more likely to offer more than the minimum if their employees are mostly salaried, higher earners and longer-tenured, and those with greater financial security or confidence.
• Pension contribution models: Nearly a third of employers operate two or more different schemes, a half offer matched contributions and 55% offer a salary sacrifice arrangement.
• Employer decision making: Only 6% of employers actively consider employee retirement adequacy when setting contribution levels.
  • 54% cite legal compliance as a factor driving contribution levels.
• Reasons for offering the minimum: 51% of employers offering only the minimum contribution say they cannot afford to contribute more.
  • 31% say this is due to it being the government-recommended level.
  • 20% say this was the default in their payroll software or pension provider set up.
  • 5% say they did not know they could contribute more.
• The potential for improvement: The priorities for employers with any new approach are minimising costs, equality, and employee flexibility.
  • The wider adoption of salary sacrifice appears to have the highest potential to boost retirement saving.
  • There is interest in using defaults and nudges and approaches which combined pension and other saving options to help employees to save more.

Points to consider

• Methodological strengths/weaknesses: The authors note that the survey was necessarily a blunt data collection tool in so far as it was not possible to document the full range of approaches to pension provision at organisations with complex pension provision.
  • The authors note that the survey data are based on self-report, which is subject to error and potential bias.
• Relevance: This report is relevant to all stakeholders, academics and policymakers with an interest in pensions and retirement planning.
• Generalisability/transferability: The research was undertaken whilst the economic impacts of Covid-19 were being felt in the UK, and before the 2022 invasion of Ukraine and escalation of the cost of living crisis. This might limit the broader generalisability of the findings over time.