Significant life events generally have little impact on private sector employees’ pension participation and contribution rates, despite being associated with large changes in spending commitments, research from the Institute for Fiscal Studies (IFS) has revealed.

The research suggested that neither big pay rises, nor paying off the mortgage, nor increased tax incentives resulted in employees increasing their retirement saving.

In particular, the report found that fewer than one-in-a-hundred private sector employees actively increase their pension contribution rate in response to a 10 per cent pay rise, with no relationship between increases in pay and changes to pension contributions even for employees aged 50–59.

In light of this, the IFS warned that many older employees in particular are missing out on an opportunity to boost retirement income at a point when their disposable income is likely to be high and spending commitments relatively low.

However, it suggested that higher minimum employee contributions for higher earners, or a form of ‘auto-escalation’, where default pension contribution rates increase alongside increases in earnings, could nudge people to make better pension saving decisions.

The research also found that workplace pension participation responds only slightly to the increase in the up-front tax incentive for pension saving at the higher-rate threshold since the introduction of auto enrolment in 2012, while contribution rates also only responded "mildly" to this incentive.

Indeed, the IFS argued that, if anything, pension saving has become even less responsive to this tax incentive since the roll-out of auto enrolment, warning that further increasing tax incentives for pension saving might not be a cost-effective way to boost retirement saving.

However, the research found that pension contributions do tend to increase by around 0.4 per cent of pay more when people move from renting to having a mortgage, also increasing by around 0.3 per cent of pay less after the arrival of a first child.

IFS therefore highlighted these findings as evidence that nudging employees to change their pension saving around major life events could have desirable effects.

For instance, the IFS suggested that mortgage providers could ask their customers in advance how much of their mortgage repayments they would like to divert into their pension when their mortgage term ends.

Commenting on the findings, IFS research economist and an author of the report, Laurence O’Brien, stated: ‘Many employees might baulk at the idea of devoting more of their pay cheque to their pension in today’s high-inflation environment.

"But when people do have extra cash available, either because of a pay rise, paying off their mortgage or their children leaving home, very few employees put any of this extra cash into their pension.

"Given concerns that many private sector employees are at risk of under saving for retirement, a natural question is whether changes to public policy could help them increase their pension saving when it makes more financial sense to do so.

"For example, higher default employee pension contribution rates at higher levels of earnings, particularly above the higher-rate threshold, or at older ages could help many make better saving decisions."

Echoing this, People’s Partnership head of policy, Tim Gosling, argued that it is "policy, not changes in individual behaviour that will close the UK’s pensions savings gap".

“This research shows just how much people’s retirement savings behaviour is shaped by decisions taken for them, not by them," he stated.

"Whether people save is strongly influenced by auto enrolment and how much they save is shaped more by the generosity of their workplace pension contribution structure than by their earnings.

“With six in 10 people not saving enough to maintain their current standard of living in retirement, policy makers should pay attention these findings."

More broadly, the research also found changing employer significantly increased the probability of private sector employees starting and stopping saving in a workplace pension.

In particular, the research found that, between 2019 and 2020, 27 per cent of private sector employees who saved into a pension and then changed employer stopped saving in a workplace pension, at least temporarily, compared with just 7 per cent of those who do not change employer.

Furthermore, 53 per cent of those who previously were not saving in a pension and subsequently change employer start saving in a workplace pension, compared with 23 per cent of those not saving in a pension who do not change employer.

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