A third of firms paying minimum AE believe this is govt recommendation

Presented at a Nest Insight conference on July 7, preliminary results of the survey, which polled 502 pension decision-makers, showed that 37 per cent of companies are offering AE minimum contributions. 

“We see the minimum employer contribution levels, set by the regulation, act as strong defaults and are actually seen as ‘recommended’ levels by some employers”, said Jo Phillips, director of research and innovation at Nest Insight.  

Alyshia Harrington-Clark, head of defined contribution, master trusts and lifetime savings at the Pensions and Lifetime Savings Association, corroborated the findings: “Some employers are considering the minimum as the recommended level, we know that this is the case for employees.

We see the minimum employer contribution levels, set by the regulation, act as strong defaults and are actually seen as ‘recommended’ levels by some employers

Jo Phillips, Nest Insight

“You might hope and expect employers had understood that there was quite a ‘baked in’ understanding that voluntary contribution would be a big component in getting some of their workforce to a more adequate saving rate.”

Trades Union Congress pensions policy officer Jack Jones noted that this assumption “makes sense”. He said: ”If you are a small employer and the government is making you offer your employees a pension scheme, you would assume that it would be a sufficient one.” 

Oversight by employers

The research also showed that from those offering minimum rates, 20 per cent of employers are offering a 3 per cent contribution to all employees due to selecting the default setting in their payroll software or pension provider set-up. 

A further 5 per cent of employers in this group did not know that it was possible to contribute more than the minimum 3 per cent.

Yet, half of employers offering minimum contributions across the board said this is due to issues of affordability.

“This suggests that there is some potential to disrupt these defaults, where affordability is not a concern,” Philips said.  

“For example, building nudges to consider alternative approaches into the systems and platforms employers are using to manage their pension contributions.”

Two-thirds of employers (62 per cent) said that their organisation is unlikely to implement a different approach to pension contributions in the next two to five years. 

An employer, with more than 30,000 staff was quoted in the research: “The cost of any payroll change is staggering. We could only do something in the future if there was a wholesale system change — if the bonnet was already up.” 

Selectivity in employer contributions

While 39 per cent offered more than the minimum contribution levels to employees, a further 19 per cent offer more than the minimum to some but not all workers.

For those employers in the latter group, 59 per cent said that this was on the basis of seniority. A further 37 per cent said their increased rates were due to historical contractual agreements. 

Moreover, 15 per cent of respondents who offer more than the minimum to some but not all of their staff have an improved contribution when an employee reaches a certain age, and half of companies said they offer matched contributions to some or all employees, according to the research. 

Responding to these numbers, Jones said: “I found the really high number of people offering higher contributions to more senior people quite depressing, given the relative needs.”

Nest will be publishing the research in its entirety this autumn.

The figures confirm growing sentiments surrounding AE contributions. In February 2022, PLSA director of policy and advocacy Nigel Peaple spoke to the Work and Pensions Committee and pushed to “increase the employer contribution from 3 per cent to 5 per cent”, with the overall goal of achieving 12 per cent AE contribution rates in the next decade.

In June 2022, the Association of British Insurers called on the government to increase minimum AE contributions to 12 per cent by 2031.