Auto enrolment triggered huge pension saving boost in small firms

New research shows the significant increase in pension saving amongst employees of small businesses in the UK thanks to automatic enrolment.

The Institute for Fiscal Studies (IFS) found that, in the absence of the policy, only a quarter (26%) of employees in small businesses were saving into a pension. Once the policy was introduced, 70% of them were -- meaning that the participation rate increased by 44 percentage points.

The study, funded by the US-based Laura and John Arnold Foundation, used data from April 2016 -- a point at which some small employers had had to introduce automatic enrolment, and others had not, depending on their employer PAYE tax code. This means it was "as good as random" as to whether an employer had introduced it, the IFS said.

Employees who were eligible for automatic enrolment into a workplace pension were those earning at least £10,000 per year, aged between 22 and the state pension age, and who had worked for their employer for at least three months.

Most of the increased participation came from employees having very low minimum contributions. However, there were also significant increases in people having much higher contributions, the IFS noted. For example, the policy caused an increase of 6 percentage points in the proportion who had a pension contribution of at least 10% of salary.

The findings are a "very positive story" for the employees of small firms, the research institute said.

Auto enrolment has also reduced the gap in pension participation between those working for larger employers and those working for smaller employers, as it has had a smaller impact on the former than the latter. However, there is still a gap that needs to be addressed: under automatic enrolment 88% of those working for medium or large employers are members of a workplace pension scheme compared to 70% of those working for a business with fewer than 30 employees.

Ongoing research at the IFS aims to help understand why the pension participation rate amongst smaller employers is lower.