Examining the Effects of Changes to UK Auto-Enrollment

Eliminating the U.K. trigger for auto-enrollment into workplace pension contributions—which currently requires an individual earn more than 10,000 pounds per year—would have a significant positive effect on the retirement outcomes for 90% of individuals, new research shows. However, the change mulled over by lawmakers across the pond may also have a negative impact on a small but considerable segment of the population, according to modeling and research commissioned by the Pension and Lifetime Savings Association and carried out by the Pensions Policy Institute.

The published report—“Every little helps: Should low earners be encouraged to save?”—explored if removing the 10,000-pound earning requirement would cause harm to the lower earners by squeezing their current income and living standards, according to a press release that accompanied the research findings.

“Our study, which examined the potential risks of financial disadvantages prompted by saving for retirement when a low earner, suggests that this change may have a negative impact on a relatively small but still considerable segment of the population, specifically 300,000 individuals out of a total low-earning working population of 3.17 million,” wrote PSLA researchers in the section about initial policy implications and questions raised by the research.

For companies trying to encourage employees to save more for retirement, some plan design features are available that, according to analysis from Vanguard, have proven to increase participation. Vanguard credited plan sponsors’ adoption of automatic enrollment and automatic escalation for U.S. deferral rates staying steadfast through the pandemic, the ensuing market volatility and recent spiking inflation, according to the 2022 PLANSPONSOR Participant Survey.

Among retirement plan participants, auto-enrollment has increased in popularity in the U.S.: For retirement plan participants surveyed in late 2022, 71% agreed employers should auto-enroll workers at a 10% default, compared with 47% in 2021 and 46% in 2020, according to American Century Investments’ 10th Annual Retirement Savers Survey.

In the U.S., the Pension Protection Act passed by Congress in 2006 allowed employers to auto-enroll workers in a workplace retirement plan. Congress followed up with the Setting Every Community up for Retirement Enhancement Act of 2019 and the SECURE 2.0 Act of 2022 to improve on the PPA, creating more incentives and requirements for plan auto-features to drive greater retirement outcomes for sponsors and participants.

SECURE 2.0 will require new retirement plans, from 2025 on, to auto-enroll qualified employees at a contribution rate between 3% and 10% of pay. Plan sponsors must then escalate the contribution rate by 1% annually until it reaches a minimum of 10% or a maximum of 15%, at the discretion of the sponsor. Participating workers can opt out of the structure and select different rates, but absent an expressed preference, sponsors must follow the automated structure as the default.

Auto-enrollment features in employer-sponsored defined contribution retirement plans are favored for removing a barrier to low- and moderate-income workers enrolling and contributing to a retirement plan and for driving higher worker contributions to workplace retirement plans, agreed Rich Johnson, senior fellow and director of the Program on Retirement Policy at the Urban Institute, a Washington, D.C.-based think tank for economic and social policy research.

“Research has shown overwhelmingly that the best way to get lower- and moderate-income workers to participate in a [retirement] plan is to just automatically put them in the plan,” he said previously.

The U.K.’s earnings threshold for auto-enrollment, currently 10,000 pounds, was included in the Pensions Act 2008 (implemented in 2012) to protect the lowest-earning workers from saving for the future when they might be better off having more money in their pockets today, the study noted. Amending the U.K. Pensions Act of 2008 would enable the U.K.’s Secretary of State to remove the Lower Earnings Limit for qualifying earnings.