Pension participation at record high but contributions cluster at minimum levels

The proportion of employees who contribute to a workplace pension has increased by almost a quarter, around 73% of UK employees had an active workplace pension scheme in 2017, up from less than 47% in 2012, ONS data has shown.

Much of this rise is down to the introduction by the Government of automatic enrolment in October 2012. Since then more than 9.5 million people have been automatically enrolled through the scheme.

In particular, automatic enrolment led to increased participation in workplace defined contribution pensions¹. Around 43% of all UK employees paid into a defined contribution pension in 2017, compared with 17% in 2012.

In the past, many workers missed out on valuable pension benefits, because their employer didn’t offer them a pension, or they didn’t apply to join their company’s pension scheme (Pensions Advisory Service). Automatic enrolment changes this.

Proportion of employees with workplace pension, by type of pension, UK, 2007 to 2017

Since the introduction of automatic enrolment, contributions to defined contribution schemes have clustered at minimum levels

While there has been a sizeable increase in the number of people participating in workplace pensions, many in the private sector with defined contribution pension schemes were contributing at relatively low levels.

Last month, the minimum overall contribution rate to an automatically enrolled pension rose from 2% to 5%, of an employee's qualifying earnings², with the minimum contribution from the employer rising from 1% to 2%. An employer may opt to pay all the total minimum however if an employer only contributes their minimum rate, the employee must make up the difference; which is now 3% rather than 1%. Next April, the total contribution rate rises again to 8%, at least 3% of which must come from an employer.

In 2017, almost half of private sector employers with defined contribution schemes contributed less than 2% of pensionable earnings, compared with around 6% in 2012.

It’s not necessarily that employers had reduced their contributions since 2012, rather that automatic enrolment has led to an influx of new savers at low rates, changing the distribution of employer contribution rates.

Similarly, employee contributions were concentrated at low levels in 2017. Around 45% of private sector employees with defined contribution pension schemes were contributing less than 1% of pensionable earnings, and only around one in three employees were contributing 3% or more.

Automatic enrolment has pulled in the young and low-paid

Auto-enrolment has led to huge gains in pension participation in groups like the young and low paid, who often weren’t provided with pension schemes.

Nearly 63% of private sector workers aged 22 to 29 paid into a defined contribution pension in 2017, up from just 16% in 2012.

Proportion of private sector workers with defined contribution pension, by age band, UK, 2007 to 2017

Among those in the lowest paid occupation groups – caring and leisure, sales and customer service, and elementary occupations – the proportion of private sector workers paying into defined contribution schemes was close to half in 2017. Five years earlier, the majority of workers in these jobs had no active workplace pension.

Proportion of private sector workers with defined contribution pension, by occupation, UK, 2007 to 2017

Because of its phased introduction, automatic enrolment has led to a sustained rise in pension participation between 2012 and 2017. When auto-enrolment was first rolled out in October 2012, it was only larger companies who were required to enrol their employees by the end of the staging date.

Proportion of private sector workers with defined contribution pension, by size of employer, UK, 2007 to 2017

Will higher contributions lead employees to stop saving?

So far, around 9 in 10 employees have remained in their workplace pension after being enrolled.

But employees with an auto-enrolment pension can choose to stop saving at any time, although they’ll lose out on future private pension benefits including contributions from their employer as well as associated tax relief from their own contributions.

With the new higher minimum contributions in force last month, some workers may have already seen an impact on their take-home pay.

Use our calculator to find out your life expectancy, your chance of living to 100 and how long you’re likely to need to make your pension pot last.

Note:

1. A defined contribution pension builds up a pension pot using your contributions and your employer’s contributions (if applicable) plus investment returns. Defined contribution pensions are concentrated in the private sector. A defined benefit pension is based on your salary and how long you’ve worked for your employer (it’s sometimes called a “final salary” pension). Most public sector pensions (94%) are defined benefit.

2. The earnings used to calculate the contribution rates presented in this article are not based on ‘qualifying earnings’ but pensionable earnings as stated by the employer and excludes employees whose pay was affected by absence. This is not necessarily the same as “qualifying earnings” defined by the auto-enrolment policy. Employers may contribute on a wider band of earnings than defined by the auto-enrolment policy.