It has been true for a long time that, in general, the larger the employer you work for, the more likely you are to be saving in a workplace pension for your retirement, and large employers tend to make a larger contribution to the pension too.
Back in 2012, only 17% of the employees of the employers with 1-50 employees were enrolled in a workplace pension, compared to 40% for employers with more than 500 employees.
How has this been affected by the introduction of automatic enrolment, which started in 2012 affecting the biggest employers and has affected all employers, even the smallest and newest employers since 2018? Research by economists at the Institute for Fiscal Studies in London has found that – looking at eligible employees of small employer with less than 30 employees – automatic enrolment has increased their participation in a workplace pension scheme by around 45 percentage points. In other words, without automatic enrolment only 23% were saving for retirement in this way, and now 70% are, which is a transformation in the saving rate of people working for small employers.
While the jump up is high, the level of pension participation, even with automatic enrolment, is not as high as it is for medium and large employers, where it averages almost 90%.
So whereas only 1 in 10 workers leave their pension scheme working for big companies, it is around 3 in 10 for the smallest ones.
Why is this the case? Having investigated this in some detail, we have some – but not all – the answers.
One thing it could be is that people working for smaller employers are less well paid, and have often been working for their employers for less time than people who work for large employers. A higher salary and longer time in the job are both good predictors of being in a pension, but the differences are nowhere near large enough to explain this different participation rate. Similarly, although larger employers tend to offer more generous pension contributions, again the differences are not big enough to drive the difference.
This basically leaves two remaining explanations that must alone, or in combination, explaining the different trend. One is that the administration of pension schemes by small employers might reduce participation, either because they actively seek to get employees to opt out to reduce costs, or because their human resources departments are less effective at explaining the benefits of pensions to their employees. The other is that ‘peer effects’ are important. In large employers, when people are automatically enrolled, they are surrounded by colleagues who are already saving in a pension, and can help explain what it is and why it is important. This is often not the case in small employers, where no one is saving in a scheme.
Either way, this should not take away from the huge increase in pension saving for the employees of small employers, which make up almost 30% of all employees in the UK. But there is more to do to fully understand why the participation rate is lower in small employers, and see if it can be boosted further.
By Jonathan Cribb
Senior Research Economist – Institute for Fiscal Studies