Employer Adjustment to Automatic Enrolment

Automatic enrolment into pension plans, where employees save at a positive default contribution rate and asset allocation unless they opt-out, is being increasingly adopted worldwide to enhance workers' future economic well-being. The UK has moved to a system where employers are obliged to offer pensions into which they auto-enrol all eligible workers.

Since 2012, more than 10 million employees in the UK have been auto-enrolled into workplace pensions because of this policy. There has been no experimental empirical evidence to date on how employers react to this increase in their wage-setting behaviour. If employers decrease wages to offset increased costs created by auto-enrolment, then workers' current economic security could decrease.

Existing research documents the effects of auto-enrolment in increasing pension participation but does not address who pays these costs. The benefits of auto-enrolment may be dampened if they are offset in other domains, such as decreased wages. These results will provide an understanding of the wider economic implications of auto-enrolment, including whether some groups are disadvantaged by the policy.

This will significantly extend understanding of socio-economic trends, challenge assumptions about the effects of autoenrolment on net wealth accumulation, and inform future public policy decisions about which groups should be eligible for auto-enrolment and at what default rates.

This project forms part of a wider programme of work being led by Professor John Gathergood, which addresses related topics such as the impact of auto-enrolment on household non-pension saving, and on household debt. This project will provide the first empirical evidence on how employers react to the increases in costs created by auto-enrolment. The initial implementation of mandatory auto-enrolment in the UK required employers to make pension contributions equal to 1% of the wages of employees who did not opt-out.

We will investigate whether employers offset these increased costs by decreasing wages, which could reduce the pre-retirement economic security of workers. To identify the effect, we will exploit the staggered roll-out of compulsory dates by which the employer was obliged to start auto-enrolling their eligible existing and new employees (the 'staging date') into a pension.

The staggered rollout occurred from October 2012 for large employers to April 2017 for small employers, with the staging dates randomised among employers (2-29 employees), from June 2015 to April 2017. Our study will focus on the latter sample, for which randomisation among employers provides an experimental design.

The project will use approaches from advanced econometrics applied to secondary data. The policy's rollout provides an experimental design, which has been exploited recently by Gathergood et al. (2024), who studied how auto-enrolment affects debt-level employees of firms with 2-29 employees. That project uses data from the UK's largest provider of autoenrolment pensions, Nest, linked to individual credit files.

The project proposed here will have access to the same Nest data, which will be merged with employee-employer-linked datasets, provided via the UK Data Archive. The data linkage is currently in progress in a project led by Professor Gathergood with Nest.