What happens to workplace pension saving when employers are obliged to enrol employees automatically?

There are concerns about individuals undersaving for retirement in countries across the developed world. In response, policymakers have proposed—and economists have studied—a large variety of schemes designed to increase saving for retirement. One instrument to boost saving for retirement of particular interest is ‘automatic enrolment’ (sometimes termed default enrolment or ‘opt-out’ design) where employers enrol employees automatically into a workplace pension scheme, which employees can then choose to leave.

Although automatic enrolment has been prominently highlighted as a particular success story of the real-world implementation of the insights of behavioural economics (Benartzi and Thaler 2013; Madrian 2014; Chetty 2015; Thaler 2016), until now almost all the evidence on the impact of automatic enrolment on participation in employer-provided pensions and pension saving comes from the voluntary introduction of automatic enrolment by large firms in the USA (Madrian and Shea (2001) and Choi et al. (2004); though Chetty et al. (2014) study a case in Denmark). In many cases, these firms have introduced automatic enrolment to comply with the Internal Revenue Service’s non-discrimination rules (see Choi et al. 2002; Butrica and Karamcheva 2015).¹ However, the effects of automatic enrolment on pension saving when employers do not voluntarily choose to introduce it (and are instead obliged by government to enrol their employees automatically) may be different—particularly if employers take action to limit pension participation, such as by providing low employer pension contributions.

This paper studies the effect of obliging employers to enrol their employees into a workplace pension, using the first ever introduction of such a policy on a nationwide scale. Specifically, we exploit the phased roll-out, by employer size, in the UK of the obligation for employers to enrol most of their employees into a pension automatically since 2012 to estimate its effect on saving in a workplace pension by private sector employees. The roll-out from largest to smallest employers introduces exogenous variation in the timing of when employers were obliged to enrol their employees in a workplace pension scheme, which we exploit using a difference-in-differences methodology. This paper provides the first assessment of the impact of automatic enrolment that allows for changes in employer behaviour in response to the policy in a context where those employers did not choose to introduce automatic enrolment. This kind of impact cannot be identified when automatic enrolment is introduced voluntarily by some large employers.

We find that obliging employers to implement automatic enrolment in the UK led to large increases in the pension participation rates and in the total contributions to workplace pensions. For targeted private sector employees, automatic enrolment led to an increase of 36 percentage points in the probability of participating in a workplace pension scheme. By 2015, 88% of targeted private sector employees who were enrolled automatically were a member of a workplace pension. The largest effects on pension participation are for those with the lowest participation rates prior to automatic enrolment: those in their 20s, lower-paid employees, those who have joined their employer more recently, and those employed in industries with low pre-reform rates of pension participation.

The policy is found to have increased the total contribution rate to a workplace pension by 1.05% of earnings, compared with a pre-reform average of 7.0%, therefore significantly boosting pension saving. One of the reasons that automatic enrolment has increased workplace pension savings is that employers’ decisions have boosted—rather than mitigated—the impact on pension savings. We find some employers enrolling their employees into pension schemes with employer contributions well above the minimum contributions mandated by the government. The effect on pension saving was also increased due to substantial spillover effects of the policy. We find that the pension participation rates of workers who were not obliged to be automatically enrolled increased by 18 percentage points on average, thereby more than doubling the pension participation rate among this group.

There are a number of important reasons that we would expect automatic enrolment to increase workplace pension participation. First, by defaulting employees into a pension scheme, automatic enrolment solves the procrastination problem (in which people think that in future they will save for retirement, but they are naive and continually put it off (O’Donoghue and Rabin 1999)). Second, because automatic enrolment involves default contributions and asset allocations, automatic enrolment makes the decision to participate less complex. Since complexity of a decision is known to lead to individuals putting off the decision to join (Tversky and Shafir 1992), automatic enrolment should therefore lead to higher participation. Third, Beshears et al. (2009) argue that individuals may see the default options under automatic enrolment as implicit advice on the best course of action. This endorsement (from either the employer or government) may lead to more people participating (and at the default contributions). Finally, there are some individuals who are automatically enrolled in a pension who were not previously offered an employer contribution to their pension, and now are offered at least 1% of qualifying earnings (see more details in Sect. 2.1). These individuals may choose to be in their workplace pension in order to be able to receive the (albeit small) employer contribution that they were not offered before.

Previous empirical evidence on the impact of automatic enrolment has been based on its voluntary introduction largely by employers in the USA. Madrian and Shea (2001) compare two cohorts of employees at a large healthcare firm in the USA, where the cohort hired later were enrolled automatically into a 401(k) scheme with a 3% default employee contribution. They find that participation rates in the pension scheme increased dramatically for the cohort that were enrolled automatically, with 86% of employees enrolled in the 401(k) after 3–15 months, compared with only 37% of those who were not subject to automatic enrolment. Moreover, they find that the 3% default contribution was extremely salient; almost 65% of the cohort eligible for automatic enrolment had contributions equal to the default rate, and the proportion of the cohort with higher contributions fell, implying that automatic enrolment led to some employees contributing less than they would have in the absence of automatic enrolment. Importantly, Chetty et al. (2014) use Danish administrative data and find that only 15% of people respond actively to automatic pension contributions (by reducing other saving), implying that, for most people, higher pension saving due to automatic contributions is not offset by reductions in other saving.

These results are of particular interest because automatic enrolment is becoming more popular among public policymakers internationally. Prior to its introduction in the UK, a small number of countries have introduced policies involving automatic enrolment, but they have been either partial or temporary (in Chile) or alongside a raft of other savings policies (in New Zealand). However, by 2017 several states in the USA (California, Connecticut, Illinois and Oregon) had legislated to introduce automatic enrolment (Munnell et al. 2016) while since 2018 new service recruits to the US military have been auto-enrolled into the Thrift Savings Plan (see Executive Office of the President 2016). Many other developed countries are also planning on (or actively considering) introducing automatic enrolment, including Germany, Ireland and Poland.

The remainder of this paper proceeds as follows. Section 2 describes the institutional setting for pensions in the UK and the details of the introduction of automatic enrolment there. Section 3 describes the data used in this paper, Sect. 4 sets out the empirical strategy, and Sect. 5 presents the results. Section 6 concludes.

The data used in this paper are from the Annual Survey of Hours and Earnings (ASHE), which is collected by the UK’s Office for National Statistics (see Office for National Statistics 2018). ASHE is a panel survey of approximately 1% of employees in Britain. Employees are included in the survey if their National Insurance number ends in a specific pair of digits. The survey is completed by employers in April of each year, and data are available from April 1997 to April 2015. The number of responses to this survey was 181,052 in 2015.⁵

The ASHE data include detailed information on the pay and hours of work of each employee, and it asks whether the employee was a member of a workplace pension scheme (‘run or facilitated by [the] organisation’). From 2004 onwards, it also asks how much the employer and the employee contributed to the pension. The data contain a number of variables on the employee, such as age, sex, occupation and job tenure. It also contains information on the employer, such as industry and sector. Using these data, we can define the set of individuals who are targeted for automatic enrolment: those aged 22 to state pension age, earning more than the automatic enrolment threshold (£10,000 ($13,000) per year since April 2014) and who have been working for their employer for at least 3 months.

Most importantly for our empirical strategy, the data contain a measure of the number of employees in the employer in each year. This measure comes from the UK government’s business register. This is crucial because, as was discussed in Sect. 2, it is the number of employees employed in April 2012 that determines when employers are obliged to introduce automatic enrolment. Our main outcomes of interest are the participation in a workplace pension scheme and the pension contribution rates.⁶ It is instructive to show the rates of pension participation and the contributions to workplace pensions prior to automatic enrolment being introduced. Figure 1 uses the ASHE data to show how pension participation has changed from 1997 to 2015. Public and private sector workers have had very different participation rates in pensions. The proportion of private sector employees in a workplace pension scheme fell from 48% in 1997 to 33% in 2012, before rising to 56% in 2015, indicating that automatic enrolment has potentially increased pension participation. Looking only at those meeting the automatic enrolment eligibility requirements (those aged 22 to the state pension age, earning over the threshold and in work, but not restricting to those employers where automatic enrolment had been introduced), it fell throughout the 2000s, before rising from 42% in 2012 to 72% in 2015. In contrast, pension participation of public sectors is much higher (at least 80% in all years 1997–2015), though it has also risen since 2012, to reach 87% in 2015.

The focus of this paper is on participation in, and contributions to, workplace pensions among private sector employees. Table 1 shows the distribution of pension contribution rates among all private sector employees (including non-participants) from employees, employers and total, prior to automatic enrolment (in April 2012). It shows that there are very few employees with very low, positive contribution rates, which are the levels at which the minimum contributions are set under automatic enrolment. Looking at employee contributions, 24% of employees contribute between 2 and 10%, with very few contributing more than 10%. On the other hand, 14% of employees have an employer contribution of more than 10% of earnings. Looking only at those who are targeted for automatic enrolment working for an employer with 58 or more employees (and therefore auto-enrolled by April 2015), they are much more likely to have higher employer and employee contribution rates.

In Appendix Tables 8 and 9, we provide descriptive statistics on private sector employees in 2012 working in employers with 58 or more employees who are targeted for automatic enrolment. They have median gross weekly earnings of £460 ($600), 61% are male, 89% work full-time, over 50% of them have worked for their employer for five years or more, they have a median age of 41 and they work across a wide range of industries, of which the largest are ‘retail and wholesale’ and ‘manufacturing’, employing 20% and 16% of the employees, respectively.

The roll-out of the obligation to enrol targeted employees automatically means that we can estimate the causal effect of automatic enrolment on participation in a workplace pension, and the contributions into it, using a difference-in-differences empirical strategy. Employees (and employers) are affected by automatic enrolment at a given time exogenously based entirely on how many employees there were in 2012 and the roll-out timetable chosen by the government, as described in Sect. 2.1. We only consider private sector employees since public sector employees had much higher workplace pension participation rates and many public sector pension plans implemented automatic enrolment prior to the latest reforms coming into effect.

Exploiting the government’s roll-out, we categorise private sector employees into 7 ‘employer size groups’.⁷ The groups are shown in Table 2. These groups are determined by rules of the roll-out and aggregate together employers who face the same obligation (to enrol targeted employees automatically) when they are observed in each April. In each year from 2013 to 2015, there are some employers who have passed their staging date, but are not 3 months past their staging date, which means that they could have introduced automatic enrolment but they might not have because they might have postponed its introduction. We term these groups ‘partially affected’ and control for them in our analysis below.

Given this roll-out, Eq. (1) sets out the difference-in-difference specification that we use to estimate the impact of automatic enrolment:

We want to estimate the effect of automatic enrolment on an outcome (such as pension participation) y, for an individual i, working for an employer in ‘employer size group’ f, observed at time t. \( ({\text{autoenrol}})_{ift} \) is a dummy variable taking the value 1 if automatic enrolment is in place in the employee’s employer when they are observed, and 0 otherwise. \( \beta \) is the coefficient of interest. It is also necessary to control for the fact that some employees work for employers that are ‘partially affected’. We therefore introduce a dummy variable for being ‘partially affected’, which varies for each year that there are people who are partially affected (2013–2015): \( \mathop \sum \limits_{a = 2013}^{2015} \gamma_{a} \left[ {{\text{partial}}\_a = 1} \right] . \)⁸

We control for fixed differences in the outcome for employees working for employers of different sizes using six ‘employer size group’ fixed effects \( \theta_{f} \). We control for time using year fixed effects \( \mu_{t} \). Under this specification, we assume that the ‘employer size group’ fixed effects are fixed over time. This is the usual common trends assumption which says that, in the absence of the reform, affected and unaffected employees would see their pension participation and contribution rates change in the same way.

We also control for a vector of characteristics of employees and the employers they work for, X. These include controls for sex, age (in cubic), job tenure (three dummies), dummies for working for a non-profit institution, being in a full-time job, the job not being the individual’s ‘main’ job and the job being temporary, 10 regional dummies, 12 dummies for industry of the employer and 8 dummies for occupational category of the employee. The full list of covariates is found in Appendix Table 11.

Figure 2 provides graphical evidence for the effect of automatic enrolment on the pension participation rate of private sector employees who meet the conditions for auto-enrolment.⁹ Each series represents employees working for private sector employers of different sizes. Prior to the introduction of automatic enrolment (between 2009 and 2012), the participation rates of each group move in a similar way, although, on average, employees working for larger employers have higher participation rates than those working for smaller employers. This suggests that—at least prior to the reform—our common trends assumption needed for identification of a causal effect is valid.

In Fig. 2, data points in which employees are enrolled automatically are shown with a square data point. Those periods in which employees are enrolled automatically see far higher pension participation rates than prior to automatic enrolment, with participation rates under auto-enrolment of between 80 and 90%, suggesting that there is a large impact of automatic enrolment on pension participation. Unsurprisingly, partially affected groups (denoted by circles in Fig. 2) have higher participation than before automatic enrolment, but not as high as when it is fully introduced. The primary outcomes of interest are the effects of automatic enrolment on the probability of participation in a workplace pension scheme and on the level and distribution of pension contributions. We estimate the effect on the probability of pension participation using a linear probability model and a probit model, and the effect on contribution rates (both mean and whether below different thresholds) using ordinary least squares (OLS). The models are estimated on data from April 2011 to April 2015, therefore including two years (2011 and 2012) in which nobody was affected by automatic enrolment and three years in which progressively more employees are enrolled automatically. Our sample size of targeted private sector employees in employers with five or more employees from 2011 to 2015 is 457,443, working for 64,849 employers. The sample size for each ‘employer size group’ in each year is shown in Appendix Table 10. There are a small number of employees with missing pension contributions, so the sample size for the effect on pension contributions is slightly smaller at 452,212.

Since automatic enrolment is implemented by employers, and they may implement it in slightly different ways (particularly in terms of how much they offer as an employer contribution), there may be a correlation in the error \( \varepsilon_{ift} \) between employees working for the same employer. In all our results, we therefore cluster our standard errors at the employer level. We show the number of clusters (employers) as well as the number of observations (employees) underlying each regression in the Results section.

With concerns about undersaving for retirement across the developed world, there is intense interest amongst economists and policymakers regarding policies that can boost saving for retirement. This paper has studied the first nationwide introduction of automatic enrolment in which employers are obliged to enrol employees into a workplace pension scheme, which employees can then choose to leave if they wish. We provide the first assessment of the impact of automatic enrolment that allows for changes in employer behaviour in response to the policy in a context where those employers did not choose to introduce automatic enrolment, but instead were obliged to do it. This kind of impact cannot be identified when automatic enrolment is introduced voluntarily by some large employers, such as was studied in Madrian and Shea (2001) and Choi et al. (2004).

We exploit the gradual roll-out by employer size of the obligation in the UK for employers to enrol their targeted employees automatically into a pension between 2012 and 2015 to estimate the effect of automatic enrolment on saving in a workplace pension by private sector employees using a difference-in-differences methodology. We find that the introduction of automatic enrolment substantially increases the probability of participation in a workplace pension scheme, by 36 percentage points. In 2015, after automatic enrolment had been introduced, the workplace pension participation rate for private sector employees who were targeted to be enrolled automatically reached 88%. This is similar to the levels of coverage delivered by automatic enrolment found in Madrian and Shea (2001) and Choi et al. (2004), and is despite the fact that in our setting automatic enrolment is an obligation imposed on employers.

The largest effects on pension participation we find are for those with the lowest participation rates prior to automatic enrolment: those in their 20s, lower-paid employees, those who have joined their employer more recently, and those employed in industries with low pre-reform rates of pension participation. We also find important new evidence that the policy has led to large increases in the participation rate of employees who are not targeted for automatic enrolment, by 18 percentage points on average, likely driven by employers deciding to enrol non-targeted employees automatically as well as targeted employees.

These increases in pension participation have led to large increases in saving in a workplace pension by employees targeted for automatic enrolment, on average increasing the total workplace pension contribution rate (expressed as a percentage of earnings) by 1.05% of earnings, compared with a pre-reform average of 7.0%. This effect is large in part because a large fraction of employers are making employer contributions above the minimum mandated under the automatic enrolment legislation. While the minimum employer contribution was 1% of (qualifying) earnings, the proportion of employees receiving more than 2% of earnings as an employer contribution rose by 8.0 percentage points, and the proportion receiving more than 5% rose by 3.3 percentage points. This increase in the proportion making contributions that are much higher than the minimum is in contrast to the previous US evidence of individuals reducing their contributions towards the default minimum (Madrian and Shea 2001). We also find no evidence of employers responding to automatic enrolment by reducing the employer contributions to newly hired employees.

Given that we find the automatic enrolment leads to an increase in the average amount of employer contributions that are made to their employee’s pensions, a key question is whether employees’ wages are reduced in response, or whether automatic enrolment is financed in some other way. The increase in average employer contributions (of 0.6% of salary) is small relative to the variance of earnings, and therefore our attempts to use the same methodology and data used in this paper to look at the effect of automatic enrolment on earnings leaves us with estimates so imprecise that we are unable to rule out wages not falling at all or falling by an amount equivalent to the total increase in employer contributions. Nevertheless, it is a question that it is important for economists and policymakers to answer in future.

Finally, this paper only looks at the effect of saving through a workplace pension. It is possible that increases in saving in a workplace pension are offset by reduced saving elsewhere. However, given that one of the reasons that automatic enrolment is thought to increase pension saving is procrastination (which leads to people not joining in the absence of automatic enrolment and not leaving once they are enrolled), we may not think that many individuals are ‘active’ enough to reduce their other saving in reaction to automatic enrolment (as is found by Chetty et al. (2014)). Therefore, the substantial increases in workplace pension participation and saving that we have found as a result of the UK’s implementation of automatic enrolment are likely to lead to many individuals having higher levels of private resources for retirement than they would have had in the absence of this policy.