According to a recent report, pension auto-enrolment is appropriate for people aged 16 to 74. Employers should also contribute when employees don’t.
The Pensions Review led by the Institute for Fiscal Studies in partnership with Abrdn Financial Fairness Trust identifies measures that can improve retirement quality of life.
The report states that while auto-enrolment has increased the participation of private sector workers in pension savings, there are still key challenges.
Fewer than half of employees in the private sector who contribute to a workplace pension pay more than 8%.
One fifth of employees do not contribute to a pension plan at work and miss out on the employer’s contribution.
According to the review, 30-40% (or around 6,000,000) of employees in the private sector who are saving for defined contribution pension plans will not be able to meet standard benchmarks at retirement. However, their prospects improve when they take into account partners’ pensions or future inheritances.
The auto-enrolment range should be increased to 16 to 74 years old from the current 22 to state pension age to encourage more people to save for their later lives.
The report also states that it is important for employees to get a pension contribution from their employer of at least 3 percent of their total salary, regardless of whether or not they pay themselves. It would be a benefit to the 22% private sector workers who opt out of pension schemes or are not automatically enrolled because of low earnings.
Laurence O’Brien is a research economist with IFS, and the author of this report. He said, “Too many employees in the private sector appear to be on track to receive a low or disappointing retirement income.”
While there are concerns about saving too little, despite the fact that automatic enrollment has increased workplace pension participation, more than 1 in 5 private sector workers do not save in a pension.
Some experts recommend increasing the minimum pension contribution from 8% up to 12%. However, the authors of this report believe that a targeted approach would be better – one that encourages employees to save at times in their life when they can.
suggests that employees could also contribute additional amounts to the total rate of 12% for earnings over PS35,000, which is around median earnings.
David Sturrock is a senior research economist with IFS. He said that it was important to consider the affordability of asking low-income individuals to pay more for their pensions, and the need for them to save.
“We propose a way to move forward which would encourage higher contributions during periods when people earn more or average earnings. You could also allow people to choose lower contributions or redirect some contributions to savings accounts.
There is a strong argument for all employees to get a pension contribution from their employer, regardless of whether or not they contribute themselves. This would be a more significant change in the system, and would benefit many low-income earners.
The authors also say that there are good arguments for raising the upper limit for qualifying earnings, if only for minimum employee contributions. Since 2021, the limit has been frozen.
The report also states that it is important to link key parameters of the auto-enrolment scheme to average earnings growth. The “earnings threshold” – the amount above which auto-enrolment is required – has fallen by 13% compared to 2012, when it was 45% more.
Mubin Haq is the chief executive officer of the Abrdn Financial Fairness Trust. He said that auto-enrolment was a great success. It has increased the number of people saving for a pension. But it can do much more, particularly for those who earn less and are not currently able to receive employer contributions into their pension pot.
The guarantee of 3% by the employer, regardless of whether or not an employee contributes to pension contributions could increase employer pension contributions in PS4bn each year. Women, part-time workers, young adults, and low-paid individuals would all benefit from this.
The previous government had stated that it aimed to lower the age of entry from 22 to 18 and lower the minimum earnings threshold to zero by the “mid-2030s”. was passed by the government in 2023 but these new powers have not yet been used.
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