Pension contribution levels will have to increase if individuals are to enjoy the retirement income they currently expect. The programme of increases in auto-enrolment contributions has concluded and for now there are no planned further increases beyond 8 per cent of band earnings. While this, combined with state pension, will give retirees on low earnings a reasonable replacement rate in retirement, for those on middle and high earnings, pension adequacy remains problematic. The problem is particularly acute for the increasing number of those approaching retirement with little or no DB benefits, especially so where these individuals have only been enrolled in DC schemes relatively recently and have not had time to build up sufficiently large pots. CLICK TO DOWNLOAD A PDF OF THE REPORT
The industry’s ability to engage employers and employees with increasing contributions has to be a key objective for the coming years.
This report analyses contribution rates by product type, gender and industry, with a view to facilitating benchmarking by advisers and consultants. It also comprises research amongst intermediaries into their approach to advising employers on their pension contribution strategy.
Key findings:
- Two-thirds (64.8 per cent) of full-time employees received an employer contribution of less than 4 per cent of earnings (April 2018)
- 22 per cent of employees were contributing 4 per cent of earnings or more
- Full-time women’s contributions are lower than men’s
- There is a wide difference in contribution levels between different industry sectors. 93 per cent of hotel and food industry staff receive an employer contribution of 4 per cent or less, compared to just 22 per cent of electricity and gas workers Consultants and advisers’ recommend contributions of on average 7.3 per cent employer and 6.1 per cent employee.
About this research
The data contained in these tables is taken from the Office for National Statistics’ (ONS) Annual Survey of Hours and Earnings (ASHE), which includes figures to April 2018. All tables reflect defined contribution (DC) pension schemes.
The figures therefore do not reflect the final increase to auto-enrolment contributions up from 3 per cent of eligible band earnings for employee contributions and 2 per cent for employers, to the full 5 per cent employee and 3 per cent employer contribution levels. The data in this report relates to pay periods that include a specified date in April, so will include a small proportion of pay periods that precede the April 2018 increase in auto-enrolment contributions to 2 per cent employer, 3 per cent employee, of band earnings.
Next year’s figures, to April 2019, will give a definitive view of contribution levels post
auto-enrolment staging increases. But the 2018 figures contained in this report still give a sense of the attitude of different sectors towards contributing to their employees’ pension. Note that contribution levels in this report are of all earnings, not band earnings as defined by auto-enrolment regulations.
The ASHE data set uses a random sample of 1 per cent of all employee jobs from HMRC’s Pay As You Earn (PAYE) system. It does not cover the self-employed, and because the survey reference point is April, it does not fully cover seasonal work, for example employees only taken on for summer or winter work. For certain data points and industries the number of responses in certain categories or contribution points can be so low as to be statistically unreliable. Here no data is given. This can lead to certain data groupings not adding up to 100 per cent, as can rounding.
Consultants and advisers were surveyed in September and October 2019.
Employer/employee contribution levels
The data shows that as at April 2018, two-thirds of full-time employees received an employer contribution of less than 4 per cent of earnings. Full-time women were slightly more likely to receive a sub-4 per cent employer contribution than men, with 67 per cent doing so, compared to 64 per cent of males.
While the ONS collects figures on part-time workers’ pension contributions it is difficult to interpret them to reveal the full impact of the gender pay gap on women who are more likely to have part-time work, which leads to being excluding from auto-enrolment altogether as earnings fall below the qualifying threshold of
£10,000 per job. Nor does the data reflect the impact on women’s DC pot sizes resulting from lower contributions due to average lower base salaries than men, an increased likelihood on missing out on tax relief through being on low pay in net pay DC arrangements, not receiving higher rate tax relief and career breaks. Research from the Pensions Policy Institute has found that women in their 60s have on average £51,100 in their private pension pots compared to £156,500 for men.
Table 1: Employer contributions – full-time, DC schemes
| All employees | Male | Female | |
| <4% | 64.8 | 63.7 | 66.7 |
| 4-8% | 16.3 | 16.8 | 15.5 |
| 8-10% | 5.7 | 6.4 | 4.5 |
| 10-12% | 4.5 | 4.9 | 3.7 |
| 12-15% | 3.9 | 3.8 | 4.1 |
| 15-20% | 2.7 | 2.4 | 3.4 |
| 20% and over | 2.1 | 2.2 | 2 |
While 35.2 per cent employers were contributing at a rate of over 4 per cent of all earnings in April 2018, very roughly equivalent to 5 per cent of band earnings and considerably more than their then legal requirement, there is a different picture when it comes to employee contributions. Just 22 per cent of employees were already contributing 4 per cent or more of total earnings.
A similar differential between male and female employees persists, with women more likely to be making contributions at lower percentage rates than men.
Table 2: Employee contributions – full-time, DC schemes
| All employees | Male | Female | |
| Zero | 4.6 | 4 | 4.6 |
| <2% | 20.9 | 17.2 | 20.9 |
| 2-3% | 39 | 38.9 | 39 |
| 3-4% | 13 | 14.4 | 13 |
| 4-5% | 6.4 | 7.4 | 6.4 |
| 5-6% | 5.5 | 6.4 | 5.5 |
| 6-7% | 2.8 | 3.5 | 2.8 |
| 7% and over | 7.7 | 8.3 | 7.7 |
Contributions by industry
The data shows a significant difference in contribution rates based on industry sector. Perhaps not surprisingly the hotel and food industry sector had the highest proportion of employees with an employer contribution of 4 per cent or less, with 93 per cent of staff receiving contributions in this bracket. The administrative & support services sectors and health & social work sectors featured second or third lowest across employer and employee contributions into DC pensions.
At the other end of the scale is what the ONS describes as the electricity, gas, steam and aircon sector, with only 22 per cent receiving less than 4 per cent, followed by financial and insurance sector with 23 per cent in this bracket. The electricity, gas, steam and aircon sector had the highest percentage of employees with an employer contribution of between 4 and 8 per cent in April 2018, with 33 per cent of staff receiving employer contributions in this bracket.
The ONS data shows the education sector had the highest proportion of employees receiving a contribution of more than 15 per cent into a DC plan, possibly resulting from a high contribution
DC arrangement replacing a DB plan. In the financial and insurance sector, 19 per cent of staff received employer contributions of between 12 and 15 per cent, with 13 per cent of staff getting a 15 to 20 per cent employer contribution. By contrast, in the accommodation sector the number of staff receiving an employer contribution of more than 8 per cent was so small as to be statistically unreliable.
Employer/employee contribution levels
The data relating to employee contributions shows a similar picture, with accommodation and food services, health and social work and administrative and support services the three sectors with the highest proportion of staff receiving an employee contribution of under 2 per cent of earnings in April 2018, with 36, 35 and 29 per cent of employees respectively contributing at these levels. Given the auto-enrolment minimum contribution of 2 per cent of band earnings at this period, these figures support the view that these sectors have large numbers of staff that will have been newly enrolled into schemes.
Education and financial & insurance stand out as the two sectors with very high employee contribution rates, with 20 and 19 per cent of staff respectively contributing more than 7 per cent of salary into their DC pension.
DC pension contributions compared to other types of pension
Employer contributions, full-time, by type
The difference in cost to employers of defined benefit pensions when compared to money purchase arrangements has been arguably the most significant driver of change in UK pensions over the last 30 years. DB schemes are notoriously expensive for employers, as Table 3 shows. Employers are required to pay a contribution in excess of 20 per cent of salary for almost a quarter of employees with DB arrangements, compared to just 2.1 per cent of defined contribution members, and just 1.2 per cent of those who still have group stakeholders.
Conversely, defined contribution schemes, classified by the ONS as occupational DC schemes, including master trusts, have the highest proportion of members for whom the employer contribution is below 4 per cent. Reducing the imbalance between the two types of pension scheme is expected to be a key objective of the DC sector going forward.
Employers offering group Sipps have the next highest contribution rates, with 55 per cent of employees enjoying employer contributions of more than 4 per cent. The data shows 47 per cent of employers with group personal pensions (GPPs) contribute in excess of 4 per cent of earnings, followed by 42 per cent for group stakeholders and 41.1 per cent for occupational DC. Occupational DC average contributions are likely to have been suppressed however as a result of the influx of large numbers of newly automatically-enrolled employees at minimum contribution rates.
Table 3: Employer contributions, full-time, by type
| Description | Zero | <4% | 4-8% | 8-10% | 10-12% | 12-15% | 15-20% | Over 20% |
| All employees | 1.1 | 40.3 | 16.0 | 4.4 | 3.8 | 12.0 | 12.8 | 9.6 |
| Defined benefit | 0.8 | 6.5 | 4.4 | 1.7 | 2.9 | 28.3 | 31.7 | 23.8 |
| Defined contribution | 1.6 | 63.2 | 16.3 | 5.7 | 4.5 | 3.9 | 2.7 | 2.1 |
| Group personal pension | 0.7 | 52.3 | 30.0 | 6.3 | 4.3 | 2.4 | 2.2 | 1.8 |
| Group stakeholder pension | 1.0 | 56.6 | 26.2 | 6.5 | 4.1 | 2.1 | 2.2 | 1.2 |
| Group self-invested personal pension | 43.6 | 33.7 | 8.3 | 5.7 | 3.1 | 2.5 | 2.1 |
Table 4: Employee contributions, full-time, by type
| Description | Zero | <2% | 2-3% | 3-4% | 4-5% | 5-6% | 6-7% | Over 7% |
| All employees | 4.0 | 11.2 | 25.5 | 11.3 | 6.9 | 11.8 | 7.1 | 22.3 |
| Defined benefit | 2.1 | 2.6 | 3.9 | 2.9 | 5.0 | 21.6 | 14.0 | 47.9 |
| Defined contribution | 4.2 | 18.5 | 38.9 | 13.9 | 7.1 | 6.1 | 3.3 | 8.1 |
| Group personal pension | 5.6 | 12.7 | 35.4 | 18.2 | 9.1 | 7.2 | 3.4 | 8.5 |
| Group stakeholder pension | 5.7 | 12.7 | 36.2 | 18.5 | 8.6 | 6.4 | 3.4 | 8.6 |
| Group self-invested personal pension | 12.6 | 10.4 | 30.0 | 15.3 | 10.2 | 8.2 | 4.2 | 9.2 |
Employee contributions, full-time, by type
The research highlights the extent to which employees within different types of pension scheme are currently contributing above the auto-enrolment minimum. It shows that members of DC schemes including master trusts, have the lowest contribution rates, with just 17.5 per cent of members contributing in more than 5 per cent of all earnings. 5 per cent of all earnings is marginally more than the 5 per cent of band earnings required by auto-enrolment, but this table still serves to illustrate those areas where contribution increases are most needed to achieve retirement readiness amongst members.
Members of group personal pensions (GPPs) were contributing slightly more, with 19.1 per cent contributing more than 5 per cent, while 21.6 per cent of group Sipp members were contributing more than 5 per cent.
None of these come close to defined benefit (DB) arrangements where 83.5 per cent of employees are paying more than 5 per cent, with 47.9 per cent contributing over 7 per cent.