Employers may have to pay more into staff retirement pots under plans being considered by chancellor Rachel Reeves as she prepares to announce a review into pensions before the House of Commons recess on 22 July.
The impending review comes amid worries that as many as 15.3 million people could be in poverty in retirement, according to the pensions company Scottish Widows.
The pensions review, likely to be flagged up in the chancellor’s Mansion House speech this evening (Tuesday) is expected to examine whether employees and employers should have to pay more under auto-enrolment.
Since 2012, those aged 22 and over who earn at least £10,000 a year from one job have been automatically signed up to their employer’s workplace pension.
Pensions auto-enrolment
Pensions regulator: make sure summer staff don’t miss out
Under the rules of auto-enrolment, workers contribute a minimum of 5% of qualifying earnings of between £6,241 and £50,270, while employers contribute 3%. Outside qualifying earnings, contribution rates are up to the employer.
Following Australia
Pension companies believe the minimum should be increased to a total of 12%, following the lead of Australia, where the minimum rate has reached 12% having risen from 9% in 2013.
The UK has also followed Australia with its ambition to combine smaller pension pots into large superfunds, as envisaged in the Pension Scheme Bill.
An employee who started their career earning £30,000 a year could have a pension pot worth about £593,000 after 40 years if the total minimum contribution rate was 12%, according to pensions experts, assuming a 5% annual investment growth after fees, and a pay rise of 2% in line with inflation every year.
This is nearly £198,000 more than with the present minimum of 8%, but this may take a hit from lower salary growth as employers look to absorb the costs of higher contributions.
The government stated in response to the speculation: “We cannot pre-empt the outcome of the review with no decision being taken relating to pension contributions. We’re reforming the pensions market to drive economic growth, ensure greater security in retirement and put more money in people’s pockets.
“Our Pension Schemes Bill will make pension pots work harder for savers, and our forthcoming Pensions Review will explore how we can take this even further to give hardworking people the retirement they deserve.”
Torsten Bell, the pensions minister, said earlier this month that there would be no increase to auto-enrolment rates during this parliament.
Include pension details in job ads
Meanwhile, the Social Market Foundation has said employers should be required by law to share their contributions to workers’ pensions in job advertisements.
The cross-party think tank called for a new legal duty on employers to disclose pension contribution rates in job ads – which it said would improve retirement incomes, boost labour market fairness, and enhance public trust in business – to be included in the Pension Schemes Bill, currently at committee stage in the Commons.
The proposal is designed to raise public awareness of pensions and stimulate demand for better employer contributions, amid worries about widespread under-saving for retirement.
The foundation pointed out that policymakers needed to take action despite a lack of political pressure to act, because voters “rarely raise pensions with MPs, and most workers remain unaware of how little they are saving or receiving from employers”.
The SMF report proposes making pension contributions visible in job ads to help workers treat pensions as a form of pay – and to encourage employers who offer better-than-minimum pension terms to highlight them as a recruitment asset.
The report also argues that the visibility of pension contributions could become a valuable new indicator for investors and policymakers concerned about corporate responsibility.
James Kirkup, SMF senior fellow and author of the report, said: “Too many people are heading for retirement without enough savings – and most of them don’t even know it. That’s partly because we’ve allowed pensions to become invisible.
Making employers state their pension contributions in job ads would help workers make better choices, create more pressure for higher contributions, and support fairer labour market competition.”
“This proposal isn’t just good for workers’ futures – it’s good for the reputation of business. Being seen to treat your staff well, including through decent pension contributions, is something the public values and supports. That’s something all political parties and responsible employers should pay attention to.”
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