Automatic enrolment to pension plans in small organisations: a research agenda

Published date07 January 2019
DOIhttps://doi.org/10.1108/ER-06-2017-0138
Pages142-157
Date07 January 2019
AuthorMaureen Maloney,Alma McCarthy
Subject MatterHR & organizational behaviour,Industrial/labour relations,Employment law
Automatic enrolment to pension
plans in small organisations: a
research agenda
Maureen Maloney and Alma McCarthy
Department of Management, National University of Ireland, Galway, Ireland
Abstract
Purpose The purpose of this paper is to analyse how firm size impacts pension workforce coverage with a
particular focus on automatic enrolment (AE) to pension plans in small organisations.
Design/methodology/approach The paper examines the alignment of government AE interests with
those of small employers, their employees and pension providers to better understand how firm size impacts
pension workforce coverage.
Findings The alignment of interests between stakeholders (government, pension providers, employers and
employees) differs between large and small organisations, and empirical findings from large organisations
cannot be assumed to apply in small organisations.
Research limitations/implications The paper calls attention to the need for future empirical research
and identifies a number of research questions for further analysis to examine how AE impacts pension
participation in small organisations and advance the field.
Originality/value The policy of automatically enroling employees into occupational pension plans,
recently legislated for all eligible workers in the UK and under consideration in the USA and Ireland, was
developed from research conducted in a small numberof large organisations. Pension coverage is particularly
inadequate for the large number of employees working in small organisations (149 employees). However,
little research attention has been focussed on pensions in small organisations with pension policy makers
assuming that legislated AE will work as effectively in small organisations as it did in large organisations.
This paper addresses this gap in the field.
Keywords Small- to medium-sized enterprises (SMEs), Pensions, Automaticenrolment, Defined contribution
Paper type Conceptual paper
Introduction
Research indicates serious shortfalls in both pension coverage (i.e. the proportion of the
workforce investing in occupationalpension plans) and in the adequacy of retirementsavings
to meet future incomeneeds during retirement in the USA( Munnell and Bleckman, 2014), the
UK (Sass, 2014) and Ireland (OECD, 2013). A commonly cited reason for insufficient pension
coverage is inertia, the behaviour of doing nothing and allowing the current situation to
prevail.In the context of pensions, inertia describesorganisations thateither: offer pensions as
a benefit but employeesnever sign up or delay enrolment for long periods; or do not provide
access to a pension and their employees fail to join a private pension plan.
Legislated automatic enrolment (AE), requiring all employers to automatically enrol their
employees into a pension plan, is seen as one solution which harnesses inertia and provides
pension access to vulnerable groups who currently rely on a state pension. The research
that drew attention to AE, and its promising potential to address inadequate pension
coverage, was conducted in three large organisations where employees were automatically
enroled into their occupational pension plan, but allowed to opt out (Choi et al., 2002;
Choi, Laibson, Madrian and Metrick, 2004; Choi, Laibson and Madrian, 2004; Madrian and
Shea, 2001). This research found that many of the individuals in demographic groups
(black, Hispanic, young, low income) that traditionally failed to opt inunder voluntary
enrolment conditions did not opt outafter they were automatically enroled into a pension
by their employers. This finding excited policy makers because these groups were the most
at risk of poverty after retirement because of insufficient pension savings.
Employee Relations
Vol. 41 No. 1, 2019
pp. 142-157
© Emerald PublishingLimited
0142-5455
DOI 10.1108/ER-06-2017-0138
Received 22 June 2017
Revised 15 March 2018
Accepted 26 April 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0142-5455.htm
142
ER
41,1
The research reported by Madrian and Shea (2001) and Choi et al. (2002) influenced the
pension policy debate in the USA, resulting in legislation that allows organisations to use
pension plan defaults to automatically enrol employees into pension plans. The UK
Government recently implemented a more aggressive policy: all employers are required to
automatically enrol eligible employees into an occupational pension plan. Similar legislation
is being considered in the USA (Munnell et al., 2012) and in Ireland (Department of Social
Protection, 2015).
A policy of legislated AE is based on the assumption that the success experienced by
large organisations, voluntarily implementing AE as a feature of their occupational pension
plan, can be replicated in all organisations, irrespective of the size (Sunstein, 2013;
Lunn, 2012; Dolan et al., 2010). This paper argues that this assumption is flawed. Willis
(2013) contended that AE in these large organisations was successful because the interests
of key stakeholders including pension providers, employers and employees were aligned.
Building on the work of Willis (2013), we suggest that the interests of key stakeholders differ
depending on the size of the organisation. Pension providers are less interested in small
organisations because transaction costs are high and asset accumulation is limited
compared to large organisations (Wood et al., 2012). The characteristics of small employers
differ from large employers; they have less resources (Hallock, 2012) and a limited capacity
to develop and implement a pension plan (Beeferman and Becker, 2010). Employees of small
organisations are generally paid less (Central Statistics Office, 2014b; US Bureau of Labor
Statistics, 2015) and have shorter employment tenure (Hope and Macken, 2007) than the
employees of large firms, characteristics associated with unpensioned members of the
workforce. While Willis (2013) explained the success of AE observed in large organisations
resulting from aligned interests, we argue that the unaligned interests of stakeholders of
small organisations will not increase workforce coverage as policy makers predict.
Therefore, firm size is a critical but, to date, unexplored consideration in pension
literature and research. Our paper aims to address this gap by explicitly analysing the role
of firm size, its effect on stakeholder alignment and the potential impact on pension
workforce coverage. In doing so, this paper makes a number of important contributions to
the field. First, to our knowledge, this is the first paper to specifically critique AE in
pensions in a small organisation context. Small organisations are a very significant part of
the Irish, UK and US economies accounting for 49, 48 and 27 per cent of all private sector
workers, respectively. Furthermore, it is these employees in particular who are the key
focus of AE policy, yet empirical research in the field to date has not focussed sufficiently
on these organisations or employees. Second, the alignment of interest among pension
stakeholders has been identified as critical for impacting pension behaviour, yet thisissue
has not been examined to date in the context of small organisations. Furthermore, the
alignment of government interests with other stakeholder interests is largely absent from
the debate. This paper specifically examines the alignment of government AE interests
with those of small employers, their employees and pension providers. Third, we identify
two employment characteristics, wages and labour market attachment that tend to
differentiate employment experiences in small vs large organisations; these
characteristics need to be considered in AE pension policy. Fourth, we propose a
number of important research questions that should be tested through empirical research
to better understand how AE in pensions will impact small organisations and employees
of small organisat ions.
The paper commences by discussing the empirical research by Madrian and Shea (2001),
Choi et al. (2002), Choi, Laibson, Madrian and Metrick (2004) and Choi, Laibson and Madrian
(2004) that reported on the success of AE in a small number of large organisations.
The following section considers the objectives of government in legislating for AE.
In the context of small business, we examine the alignment of stakeholdersinterests
143
Pension plans
in small
organisations

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