The take-home pay of low earners would be particularly affected by reducing or removing the ‘lower limit of qualifying earnings’, according to a report by the Institute for Fiscal Studies.
The report highlights the challenges of the need to increase employer and employee contributions to address the pensions adequacy crisis highlighted in the interim Pensions Commission report, against those employees who may face immediate debt or cost of living concerns.
Assuming full pass through of employer contributions into lower wages, the total reduction in take-home pay for the lowest earnings third of employees would be 1.2 per cent if the minimum contribution rate was set to 12 per cent of qualifying earnings of £6,240 to £65,000.
If the 12 per cent contributions were instead calculated on earnings from first pound, without the lower limit of qualifying earnings, the reduction in take-home pay for low earners would be 4 per cent.
While pension adequacy reforms would potentially impact take home pay of all earners, those in higher brackets would be affected less, according to the IFS.
For example, raising minimum contribution rates to 12 per cent of a qualifying earnings band of £6,240 to £65,000 would result in a reduction of 0.4 per cent of take-home pay due to higher employee contributions and a further 0.8 per cent reduction assuming full pass through of employer contributions to wages.
The effect on the highest earning third is smaller – the reduction in take-home pay from higher employee contributions is 0.2 per cent and higher employer contributions 0.4 per cent, compared with 0.3 per cent and 0.9 per cent respectively for the lowest earning third.
The IFS also referenced data collected by the Commission which showed that 15 million working-age people are undersaving for retirement based on a ‘target replacement rate’ measure, implying that they are expected to face significant falls in their income and standard of living at retirement.
Robert Cochran, retirement expert at Scottish Widows, says: “These findings from the IFS reinforce what many in the industry have been saying for some time – while auto-enrolment has transformed retirement saving in the UK, minimum contribution rates alone aren’t enough to help most people achieve a comfortable retirement.”
“Scottish Widows modelling shows that raising total contribution rates from 8 per cent to 12 per cent on the first £30,000 of salaries could increase projected retirement pots by an average of £40,000. When paired with better employee understanding and engagement of workplace pension schemes, sharing the burden, shares the load and changes like these could really positively impact people’s futures.”