Pensions auto-enrolment should apply between age 16 and 74 and employers should contribute even when employees do not, according to a new report.
Research undertaken as part of the Pensions Review, led by the Institute for Fiscal Studies (IFS) in partnership with the Abrdn Financial Fairness Trust, sets out measures to improve the standard of living in retirement.
While auto-enrolment, introduced in the UK 12 years ago, has dramatically increased private sector employees’ participation in pension saving, key challenges remain, according to the report.
Auto-enrolment age
Only a quarter of employers feel their DC pension adequate
Less than half of private sector employees who save into a workplace pension contribute more than 8% of their earnings.
One-fifth do not save into a workplace pension and therefore miss out on their employer’s pension contribution.
The review found that 30-40% of private sector employees – around 6 million people – saving in defined contribution pension schemes will have individual incomes that fall short of standard benchmarks in retirement, although their prospects look better when accounting for partners’ pensions and potential future inheritances.
It recommends the auto-enrolment age range should be changed to age 16 to 74 from the current range of age 22 to the state pension age, to help more in paid work save for later life.
It also says there is a strong case for employees to receive an employer pension contribution of at least 3% of total pay, irrespective of whether they contribute themselves. This would benefit the 22% of private sector employees who either opt out of their pension scheme or who are not auto-enrolled due to low earnings.
Laurence O’Brien, research economist at IFS and report author, said: “Too many private sector employees appear on course to end up on a low – or disappointing – retirement income.
“While there is often concern about savers not saving enough, an additional problem is that despite automatic enrolment boosting workplace pension membership, more than one in five private sector employees are still not saving in a pension.”
Some experts advocate increasing minimum pension contributions from 8% to 12%, but the report’s authors think that a more targeted approach – that helps employees to save more at points in their lives when they are able to – would be preferable.
The report also suggests there could be a 12% default total contribution rate for earnings above £35,000 (around median full-time earnings), with additional contributions coming from employees.
David Sturrock, senior research economist at IFS, said: “It is really important to take seriously the affordability of asking for bigger pension contributions from many low-earning individuals, as well as the need for many to save more.
“We suggest a way forward that would focus the encouragement of higher contributions on periods of life when people have average, or higher, earnings. Allowing people to opt down to lower contributions, or diverting some contributions into savings accounts, are also good options.
“There is a strong case for almost all employees to receive an employer pension contribution, irrespective of whether they make a contribution themselves. That would be a bigger change to the system – and one that would likely be of particular benefit to many low earners.’
The authors say there is also a good case for the upper limit on qualifying earnings to be raised, at least for minimum employee contributions. The limit has been frozen at £50,270 since 2021.
They also say there is a clear need to index key parameters in the auto-enrolment system to average earnings growth. The “earnings trigger”– above which people have to be auto-enrolled – is now 13% below the value of a full state pension (£11,502), whereas in 2012 it was 45% higher.
Mubin Haq, chief executive of the Abrdn Financial Fairness Trust, said: “Auto-enrolment has been a huge success, significantly increasing the numbers saving into a pension. However, there’s much more it could achieve, especially for low earners who are currently missing out from an employer paying into their pension pot.
“Guaranteeing 3% from the employer regardless of whether an employee makes a contribution could boost employer pension contributions by £4bn per year. This would particularly benefit women, those working part-time, young adults and the low-paid.”
The previous government stated an ambition to reduce the lower earnings limit to zero in the “mid-2020s” and to lower the starting age from 22 to 18. While legislation was passed in 2023, these new legal powers have yet to be exercised.
Reward, compensation and benefits opportunities
Sign up to our weekly round-up of HR news and guidance
Receive the Personnel Today Direct e-newsletter every Wednesday
Browse all comp and benefits jobs
