Minimum auto-enrolment contributions should rise to 12 per cent over the next decade, with access to these workplace pensions being widened, according to a new report published today by the Association of British Insurers.
The ABI says an action plan is needed to build on the success of AE, and set out a plan for how it would like to see these pensions should evolve between over he next decade.
Some of these proposals have been recommended by a previous independent review of AE, which the government has committed to implement in the mid 2020s. But the insurance and pensions industry says there is now an “urgent needs” to legislate to introduce these changes soon, with a clear timetable for implementation.
In addition to this the ABI says the government needs to take step to boost overall contributions levels.
It points out that AE has brought more than 10m people into workplace pensions. It points out that low opt-out rates have led to more than £28bn extra being saved into workplace pensions in 2020 when compared to 2012 levels.
But under current rules employers only automatically enrol staff into the scheme if they are over the age of 22 and earn at least £10,000. This means many lower paid workers, including those working part-time are missing out on valuable pension contributions. This disproportionately affects women.
The ABI adds that despite the increase in the number of people saving, many are not be building sufficient funds for a comfortable retirement if they stick to minimum levels.
To address this the ABI recommends gradually increasing the minimum rates for 8 per cent to 12 per cent between now and 2032 – with these higher rates being split equally between employee and employer, so both would contribute 6 per cent of relevant earnings.
Currently the 8 per cent contribution is made up of a 3 per cent employer contribution and a a 5 per cent employee contributions.
Alternatively it suggest the minimum contribution could be set at 10 per cent, with the option to “opt up” to 12 per cent
The report, Automatic Enrolment: What will the next decade bring? recommends a timetable for introducing increases from 2025, but says further research is necessary to determine which options may be more affordable and effective for both employers and employes.
The ABI also suggested that the government look at a system to boost pension saving for the self-employed, but says the current structure of the AE system may not be appropriate for these workers.
The report has been welcomed by the pensions industry. Standard Life, workplace managing director Gail Izat says: “The progress of auto enrolment in embedding a savings culture in UK workplaces is in grave danger of stalling if contribution rates don’t change over the next decade.
“Simply saving into a pension is no guarantee of a good life in retirement, especially at lower contribution rates, when many will face the prospect of a substantial drop in their standard of living when they reach retirement.
“The ABI’s call for the minimum contribution level to increase up to 12 per cent over the next decade is sensible and, if combined with other measures such as the removal of current lower earnings limit and opening up AE to 18-year-olds, will prevent future generations from sleeping walking into retirement while thinking that their savings will be sufficient to support them in later life.”
She adds: “Given the current economic conditions are putting pressure on both corporate and personal finances it will be important to carefully consider how these changes can be implemented. Given it is most likely that such changes would be phased in over a number of years we believe that it is important for the decisions to be made in the very near future.”
Hargreaves Lansdown, senior pensions and retirement analyst Helen Morrissey points out that employers in the Australian system contribute 10 per cent of employees pension. She adds: “Boosting savings levels is a tricky balancing act. We need people to save more for tomorrow but not at the cost of harming them today and the pandemic and ongoing cost of living crisis has had a significant impact on the population’s financial resilience.
“The report highlights the important role of the employer contribution – in Australia their contribution is currently 10 per cent – much higher than the 3 per cent they currently pay in the UK. An initial increase in their contribution to 5 per cent from 2028 would do much to boost people’s retirement incomes – keeping them contributing to a pension without putting further pressure on their daily finances.
“A further increase in both employer and employee contributions to 6 per cent from 2031 would see people saving significantly more without having to make a huge financial sacrifice – the ability to opt up or down would mean people were not under pressure to make contributions they couldn’t afford.”
Fidelity International head of pension products & policy James Carter adds: “While the Government has confirmed its commitment to implementing the 2017 Automatic Enrolment Review recommendations in the mid-2020s, it has also identified the need to further consider the rates of contributions required under automatic enrolment and improve pension participation for the self-employed.
“It’s important that these issues are pursued and we believe now is right time to review the UK’s pension system in the round, including the State Pension. For lower earners, the State Pension currently provides the majority of their retirement income. The future value of the triple lock and the State Pension therefore directly influences the level of provision that workplace pensions need to offer.”