Putting coins in a piggy bank

Every little helps: Pension auto enrolment has been found to help people's credit scores

New research suggests that automatic enrolment into pension saving can impact other areas of people’s finances.

Most people who have been automatically enrolled have not opted out, so their employers are deducting money from each pay slip to put into a pension pot.

While this is a good thing, what if some of these people are taking on more debt to compensate for the cost of these contributions?

Warwick Business School has been working with Nest Insight, the research arm of Nest Pensions, the University of Nottingham and credit rating firm Experian to generate a new dataset that matches up people’s pension and credit records, creating a unique opportunity to explore the interaction between auto enrolment and other areas of people’s finances, while preserving people’s data privacy.

The research was made possible with the support of the BlackRock Foundation and the Money and Pensions Service, and enabled by Nest Insight's emergency savings programme that was also supported by JP Morgan Chase.

Pension auto enrolment boosts people's credit scores

As well as increasing people’s pension savings - average savings in Nest were £32 per month, and estimated total pension savings were £38 - the research found that after being automatically enrolled people’s credit scores showed a positive increase over time and their likelihood of defaulting on debts decreased.

Interestingly, people were also slightly more likely to take out a mortgage, suggesting perhaps that being automatically enrolled may have encouraged some to take another step on their financial journeys.

The research also found that during the early stages of the auto enrolment roll-out, there was an average increase of £7 per month in existing overdrafts or loans.

While this may have been a short-term effect as people adjusted to the cost of their pension contributions, the evidence does suggest a need for nuance in any consideration of raising auto enrolment minimum contribution levels in the future.

Matthew Blakstad, Analysis Director at Nest Insight, said: “The introduction of auto enrolment significantly increased people's savings, meaning that most UK workers are now building towards greater financial security for later life. More recently there have been calls on the UK Government to increase minimum auto enrolment contribution levels. This research therefore provides a timely reminder of just how interconnected people's finances are.

“While the initial increase in debt that some savers experienced is small, the research highlights the need to take into account the potential impact on people’s wider financial lives when considering any changes to auto enrolment.

“If contribution rates were to increase, it may be that an additional ‘safety valve’, particularly for those on lower earnings, could help protect people against potentially negative outcomes. One option could be to introduce an emergency savings component to the workplace auto enrolment system.

“Our own trials of emergency savings are showing how this can work in the real world. We’re excited to see the positive impact that greater take-up of these approaches will make.”

Neil Stewart, Professor of Behavioural Science, said: “In order to understand the full effect on individuals of policies such as automatic enrolment into pension saving, we need to look beyond the immediate impact on what happens within the pension to the wider impact on the individual finances.

“This research demonstrates the value of that approach. By linking pension data with data on other aspects of individual finances, we have been able to statistically quantify the effect of automatic enrolment on individual debt.

“The results from this study suggest that automatic enrolment may have quite complex effects on individual finances, affecting credit worthiness, mortgage decisions and unsecured borrowing. This research is valuable because it informs current policy debates over future contribution rates, while also helping to build a picture of the medium-term impact of automatic enrolment.”

Introduced in 2012, auto enrolment has helped millions of people in the UK who weren’t contributing to a pension to begin doing so. It’s estimated that annual pension contributions increased by more than £32 billion in 2021 compared to 2012, as a result of the policy.

To conduct the analysis, Nest Insight worked with leading researchers from Harvard, Nottingham, and Yale universities, as well as Warwick Business School.

Together they looked at the roll-out of auto enrolment at employers with fewer than 30 workers, which took place between 2015 and 2017.

The default minimum contribution rate at this time was just two per cent of income, with the employee usually paying on per cent.

Because the timing of the roll-out was randomised at the employer level, the researchers were able to see with a high degree of accuracy the effects of auto enrolment on the financial experiences of the hundreds of thousands of people who were enrolled into Nest at this time.

Further reading:

Is your credit card statement nudging you into more debt?

Why using direct debits may add to your credit card bill

Does Pension Automatic Enrollment Increase Debt? Evidence from a Large-Scale Natural Experiment


Neil Stewart teaches Behavioural Sciences for the Manager on the Executive MBA and Executive MBA (London). He also lectures on Business Statistics on the MSc Business Analytics.

Learn more about using Behavioural Science on the four-day Executive Education course Behavioural Science in Consumers and Markets.

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