When And Why Do Employees Change Their Pension Saving?

24th February 2023

Key findings -
Changing employer significantly increases the probability of private sector employees starting and stopping saving in a workplace pension. Between 2019 and 2020, 27% of private sector employees who save in a pension and then change employer stop saving in a workplace pension (at least temporarily), compared with just 7% of those who do not change employer. Furthermore, 53% of those who previously were not saving in a pension and subsequently change employer start saving in a workplace pension, compared with 23% of those not saving in a pension who do not change employer.

Comparisons with 2005-12 suggest that automatic enrolment has significantly changed how moving employer affects workplace pension participation. In particular, a much higher share of private sector employees, 54% (versus 27%), used to stop saving in a workplace pension when changing employer prior to automatic enrolment. At the same time, starting to save in a workplace pension when changing employer is much more common in 2019-20 than in 2005-12.

Changes in earnings only have a small effect on pension saving decisions, despite strong theoretical reasons for them to be linked. In 2005-12, before automatic enrolment was rolled out, a 10% increase in real earnings over five years is associated with only around a 1 percentage point increase in the probability of joining a pension among those aged 22-29, falling to an even smaller 0.2-0.6ppt increase in the probability of joining a pension among those aged 50-59. We find changes in earnings still have a small effect on pension participation in 2019-20, except for when they lead to someone earning at least £10,000 a year and their employer therefore being required to enrol them automatically into a workplace pension.

Higher minimum employee contributions for higher earners, or a form of ‘auto-escalation' - that is, for default pension contribution rates to increase alongside increases in earnings - could therefore nudge people to make better pension saving decisions. There are good reasons for many people to make higher pension contributions in years when their earnings are higher in order to smooth their living standards over their life, but our results suggest that people are currently only making small changes in pension contribution rates as earnings rise.

There is little evidence of people changing their pension saving at any particular ‘trigger age'. Before automatic enrolment, the probabilities of pension savers increasing or decreasing their pension contribution rate by more than 1% of earnings over the course of a year are around 12% and 8%, respectively, and vary little with age.

Workplace pension participation responds only slightly to the increase in the up-front tax incentive for pension saving at the higher-rate threshold. Prior to automatic enrolment, if employees earning £60,000 received 20% up-front income tax relief on their pension saving (rather than 40%), then pension participation would fall by 1 percentage point, from 60% to 59%. This is only a very small change in participation for a large change in the up-front tax incentive.

Pension contribution rates also only respond mildly to this tax incentive. Taking an employee earning £60,000 per year and contributing £3,000 per year into their pension, we find that prior to automatic enrolment they contribute only about £75 more into their pension per year because they receive up-front tax relief of 40% rather than 20% on pension saving.

If anything, pension saving has become even less responsive to this tax incentive since the roll-out of automatic enrolment. This is consistent with automatic enrolment bringing more ‘passive savers' into workplace pension saving. Further increasing tax incentives for pension saving might therefore not be a cost-effective way of boosting retirement saving, though this work does not provide evidence on how saving might respond to substantial changes in the structure of pensions taxation.

We analyse how pension saving is affected by different life events - namely, changes in the number of dependent children at home, housing tenure, marital status, and whether someone's partner is in paid work or not. We find that these significant events in people's lives generally have little impact on private sector employees' pension participation and contribution rates.

This is despite most of these life events being associated with large changes in spending commitments, income or the cost of living, making them a good time to change pension saving. For example, paying off your mortgage is associated with a large increase in disposable income – and therefore we might think many people would want to put more in their pension after this point than before it.

We do find that pension contributions tend to increase by around 0.4% of pay more when people move from renting to having a mortgage (which in recent years has been associated with a decrease in spending needs and therefore more disposable income). This could also be consistent with no longer needing to save for a deposit.

Pension contributions tend to increase by around 0.3% of pay less after the arrival of a first child (which is typically associated with an increase in spending needs). The magnitude of this effect is slightly larger for women, at 0.5% of pay, than for men (for whom the effect is 0.2% of pay and not statistically significantly different from zero).
These findings suggest that nudging employees to change their pension saving around major life events could have desirable effects. One example would be for mortgage providers to ask their customers in advance how much of their mortgage repayments they would like to divert into their pension when their mortgage term ends, and making it as easy as possible to achieve this.

Read the full report HERE
Pdf 61 Pages

Further Reading
The Effect of Tax Incentives on Private Pension Saving
Pdf 29 Pages