IFS study of US firms links auto-enrolment to contribution fall

The Institute for Fiscal Studies says employees auto-enrolled into pensions are likely to stick to default contribution rates and investment strategies as they will perceive them to be the “recommended” options.

An IFS study, published this week, looks at auto-enrolment schemes in US firms.

One firm found that only 37 per cent of 4,257 staff signed up to the company pension scheme before auto-enrolment was introduced but 86 per cent of the 5,812 people auto-enrolled stayed in the scheme.

Before auto-enrolment, 4 per cent of all employees chose to contribute 3 per cent to their pension but when it was made the default under auto-enrolment, 65 per cent of all staff paid that amount.

Before auto-enrolment, 25 per cent contributed 6 per cent or more to their pension but this fell to 18 per cent after auto-enrolment.

Employees investing in the default fund increased from 6 per cent to 80 per cent after auto-enrolment.

IFS senior research economist and one of the report’s authors Andrew Leicester says: “Auto-enrolment does lead to many more people saving but as default rates and funds appear to be recommended approaches, people assume it is the right thing to do, when they may have chosen a more aggressive plan. This could have long-term implications as employers could see the default as what they should offer staff.”

Saga chief executive Ros Altmann (pictured) says: “Default funds could be right for someone if they are well designed but often they are not. This is another example of how, without advice, which is getting harder to get in a cost-effective way, people often cannot cope.”

Pensions minister Steve Webb has indicated he is keen on auto-escalation to boost how much people pay into their pension after auto-enrolment. In the US this is known as “save more tomorrow”.

Leicester says: “It does lead to increased savings but presenting different options that might be better for an individual makes it less likely people will chose one.”