NEST: Employer pension contributions in the UK

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

Context

The report investigates employer pension contributions in the UK, a critical issue given the need for adequate retirement income among workers. With auto enrolment increasing pension participation, understanding employer contribution practices is essential for enhancing financial security. Key concepts include defined contribution (DC) pensions, minimum contribution levels, and alternative models like salary sacrifice. The study aims to identify current practices and explore potential improvements to better support employees’ retirement outcomes.

The study

This report explores employer pension contributions in the UK, targeting a population of UK employers and employees. It aims to understand the current contribution landscape and how changes could enhance retirement income adequacy.

The study was commissioned by Nest Insight, supported by abrdn Financial Fairness Trust and YouGov, to inform strategies for financial security in retirement. Data were gathered through qualitative interviews and a nationally representative survey of pension decision-makers. The findings aim to guide policy and practice in improving pension outcomes for UK workers.

Key findings

Key findings include:

• 4 in 10 employees work for an employer offering the minimum 3% employer contribution to all their employees.
  • A further 2 in 10 employees work for an employer which offers the minimum contribution for some of their employees

Reasons for employers offering the minimum employer contributions include:

• Affordability and prioritising putting money into base salaries.
• Nearly 1 in 3 say that is because it is the amount recommended by government.
• 1 in 5 say they were driven by the default setting in their payroll software or pension provider set up.
• 1 in 20 say they did not know it was possible for an employer to contribute more than 3%.

Larger employers are more likely to offer above-minimum contributions to their employees:

• 4 in 10 employees work for an employer offering more than the minimum 3% employer contribution to all their employees.
• Around half of large employers offer employer contributions above 3% for all their employees, compared to only a quarter of small organisations.

Employers are more likely to offer above-minimum contributions if they predominately have employees that are: Salaried; Higher earners; Longer tenured

Nearly 2 in 3 employers say their organisation is unlikely to implement a different approach to pensions contributions in the next two to five years…rising to 3 in 4 smaller employers.

Points to consider

• Relevance: The study provides insights into employer pension contributions in the UK, highlighting patterns, behaviors, and factors influencing employer decisions.
• Generalisability/ transferability: The study is generalisable primarily to UK employers who participate in pension schemes, particularly those similar to the National Employment Savings Trust (NEST) and other defined contribution pension plans. It may also apply to policymakers, researchers, and stakeholders interested in understanding employer pension contributions within this specific context. However, the findings may not be fully applicable to employers outside the UK or those with different pension schemes and regulatory environments.
• Applicability: This study will be of interest to policymakers, employers, and stakeholders about current practices and potential areas for reform in the pension system.