- UK employers will offer just 37.5% of the minimum employer contribution from 2019 compared to other countries such as Italy, Denmark and Japan, whose models are a sophisticated blend of both voluntary and compulsory workplace pensions.
- Findings reveal that the risk of UK workers opting out of pensions when statutory minimum contributions increase in 2018 and 2019 can be dramatically reduced if government re-balance the contributions, so that a greater share of the total contribution is paid by the employer.
A new report published today by the Pensions Policy Institute (PPI), commissioned by NOW: Pensions, shows that UK employers are bearing less of the pensions burden than other countries that have nationwide automatic enrolment schemes or nationwide DC schemes.
The study, which examined pension provision in Italy, New Zealand, Japan and Denmark revealed that in the UK, employers making auto enrolment minimum contributions will be bearing just 37.5% of the contribution burden. This compares to 84.8% in Italy, 66.7% in Denmark and at least 50% in Japan. The only country which is less generous, is New Zealand where some employers bear only 27% of the burden, although that rises to 50% for employees that select New Zealand’s bottom tier.
Further research* conducted by NOW: Pensions revealed nearly a quarter (24%) of auto enrolled savers “definitely will” or “might” opt out, when minimum contributions hit 8% of qualifying earnings in 2019. But, nearly three quarters (74%) of those that intend to opt out say they would either “definitely” or “probably” continue to save into their workplace pension, if contributions were rebalanced and employers put in a minimum of 5% with a 3% staff contribution.
Adrian Boulding, Director of Policy at NOW: Pensions said: “Auto enrolment continues to evolve and the 2017 review is an opportunity to pause and reflect on the future direction of the policy.
“The PPI report highlights that UK employers are not pulling their weight compared with other countries with similar regimes. Right now, the message is strong and clear – you pay in and your employer matches it. But as the higher statutory minimum contributions are phased in over 2018 and 2019, employees will find themselves bearing more of the burden than their employer and this inequality could drive opt outs.
“The auto enrolment review should certainly consider if this balance is right.”
Priya Khambhaita, Senior Policy Researcher at the PPI said: “Higher pension contributions are associated with improved retirement outcomes. In comparing the UK scenario to countries that have nationwide automatic enrolment schemes and other Defined Contribution schemes, it is evident that there are a number of countries where the average employer contribution is higher than in the UK. Rebalancing the ratio of employer/employee contributions for a higher employer contribution could encourage a greater proportion of employees to continue to save in their workplace pensions.”
Summary of findings:
All countries analysed in the report have a multi stakeholder approach to pension saving with contributions made up of employer, employee and government. The report concludes that the most successful policies acknowledge the fiscal constraints faced by all parties and allow contributions to increase gradually.
UK auto enrolment legislation began in 2012 requiring employers to bring employees into pensions on at least a statutory minimum contribution unless the employee opts out. Contributions are currently 1% of pensionable earnings from both employer and employee. Contributions will rise in 2018 and 2019, leading to a total of 8% made up of 3% employer and 5% employee.
UK employers bearing just 37.5% of the burden.
Automatic enrolment was introduced for new private sector employees in 2007. Italian workers can opt out within six months and keep money as severance pay. The Italian contribution model is currently made up of employers: 6.9% with employees: voluntary. Labour contracts covering most employees provide for an additional employer’s contribution in the range of 1% to 1.5% conditional on a matching employee contribution.
Italian employers bearing at least 84.8% of the burden, rising to 100% in some cases.
90% of the population are included in a third tier of occupational pensions apart from the state pension and compulsory labour market pension (ATP). Higher contribution rates generally apply to higher income and higher education groups (as they join the workforce later so have less time to build up a pension) but average 10% from employer and 5% from employee. Employers pay around two-thirds of the contributions in both the 2nd and 3rd tiers.
Danish employers bearing 66.7% of the burden.
In Japan, employees are required to match the contributions of their employers, reflecting the culture of paternalism and respect for authority. Employees cannot make contributions that exceed those made by their employer.
Japanese employers bearing at least 50% of the burden.
KiwiSaver, was introduced in New Zealand in 2007. When starting a new job, employees aged between 18 to 64 years are automatically enrolled by their employers into a qualifying scheme. They then have eight weeks to opt out. Employers in New Zealand make contributions of at least 3% of salary to the scheme on behalf of their employees. Employees can choose to contribute either the default rate of 3%, or 4% or 8% of gross pay.
New Zealand employers bearing at least 27% of the burden, rising to 50% for employees on the default rate.
Notes to editors
*Research conducted by Opinium from 12 – 15 July 2016 with 2,004 nationally representative UK workers (aged 18+). Of these, 1127 have been auto enrolled.