Lower employee pension participation rates among smaller employers remains a “puzzle”, despite the gap being reduced through auto-enrolment, the Institute for Fiscal Studies (IFS) has found.

In a research paper, Pensions for almost all: automatic enrolment for employees of small employers, published yesterday, 26 March, the IFS said that the number of employees of smaller employers saving increased from 26 per cent to 70 per cent from April 2016.

Despite this, a “sizable gap still remains” as 88 per cent of those working for medium or large employers are members of a workplace pension scheme – a gap that the IFS said cannot be explained through pay, occupation, gender or age.

The research stated: “It therefore remains a puzzle as to why the pension participation rate among smaller employers is lower. It could be that people who do not think or worry about their retirement are particularly likely to work for smaller employers, or that smaller employers encourage employees to opt out to save on the cost of providing the pension.

“Alternatively, it could be that small employers are less effective at communicating the benefits of saving in a pension, particularly if this is the first time that they have provided one.”

Previous to the auto-enrolment policy, only 26 per cent of employees of small employers were saving into a workplace pension, meaning the policy boosted participation by 44 per cent, compared to a 37 per cent boost for medium to large employers between 2012 and 2015.

According to the IFS, the boost comes mainly from the younger workers, the lowest earners and those who are relatively new to the company.

It added: “Understanding this puzzle is important – a key issue for automatic enrolment is the extent to which it gets the right people into a workplace pension and the right people to opt out of being in one.

“This is the subject of ongoing research at the IFS. But overall the evidence so far on automatic enrolment is positive: large numbers of employees are brought into workplace pensions.”

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