Current pension contribution policy falls short of adequacy for many savers, and raising contributions to 12 per cent would significantly improve retirement outcomes for most low and middle-income households.
This is according to findings from Pensions UK’s newly published independent report titled ‘Closing the gaps: can flexible contributions make retirement savings more affordable?’ It looks at whether greater flexibility in workplace pension contributions could improve affordability for low-income households.
The report, which draws on modelling by the Pensions Policy Institute, qualitative research with consumers conducted by Counterpoint Research, finds that no single reform option considered as part of the research clearly meets all three goals – adequacy, affordability and fairness – at the same time. Instead, it underlines the trade-offs policymakers must face as they consider automatic enrolment reforms.
It notes that some forms of flexibility have the potential to improve both short-term affordability and long-term adequacy, but there is limited appetite for a more complex system.
The research participants preferred a simple, government-set default and are wary of reforms that could weaken their retirement outcomes or create confusion.
The report looked at various possible reforms to workplace pension contribution structures in automatic enrolment, including a minimum automatic enrolment contribution rise to 12 per cent overall, which would be split between the employer and the employee.
It looked at its impact, such as removing the Lower Earnings Limit, allowing employees to opt down rather than opt out of contributions altogether, allowing some employees to receive employer contributions where they do not contribute themselves and adopting tiered contribution rates for different income levels.
It also notes that affordability pressures are genuine and that many savers interviewed value the default pension system and are reluctant to take up options that would reduce their contributions.
Meanwhile, more flexible contribution options may look attractive in principle, but could increase complexity for both savers and employers, and further research would be required to establish how they would be used if they were offered
Additionally, smaller employers, in particular, are concerned that greater flexibility could increase administration burdens and the risk of unintended non-compliance.
The report launches as the Second Pensions Commission examines the future of pension saving through the lenses of adequacy, affordability and fairness.
Pensions UK deputy director for strategic policy and research Matthew Blakstad says: “Pensions UK has long argued that minimum automatic enrolment contributions need to rise. But we know this would exacerbate affordability challenges for some low earners. This major new research report, a year in the making, is intended to help the re-formed Pensions Commission consider how to manage that risk, particularly through building greater flexibilities into the system.
“It finds that some forms of flexibility have the potential to improve both short-term affordability and long-term adequacy. But our research with members of the public found limited appetite for added complexity from either savers or employers. There is no perfect answer to this policy dilemma: this research is intended to help ensure that decisions about future system design are made eyes-open to the risks and trade-offs.
Aviva managing director of wealth Michele Golunska says: “Millions of people are saving into a workplace pension because automatic enrolment works – but contribution levels are still unlikely to deliver the retirement many expect. The challenge is strengthening the system in a way that works for both employers and employees.
“The Pensions Commission has a vital role to play in building consensus around what comes next. Government can support by providing a clear, phased roadmap so savers and employers know what is coming and reforms can be introduced fairly and effectively.”
Cushon director of policy & research Steve Watson says: “The pensions industry is at a crossroads. Auto-enrolment has done fantastic work using inertia to help millions save for their retirements. But we must now throw all our efforts at engaging millions of savers with their pension pots to drive better outcomes. And, as this report suggests, it’s crucial we strike a balance between encouraging greater saving and offering the simplicity and flexibility people need.”
L&G head of product policy strategy Colin Clarke says: “Improving retirement adequacy is complex and will require a mix of approaches, including moving beyond a ‘set and forget’ mindset by giving people better visibility of their pension savings, more relevant prompts, and the right support to make informed decisions about their future.
“Part of this will include using insight and data to better understand what works, and to support solutions that feel realistic, sustainable and give people greater confidence in their financial future.”
Nest director of impact and public affairs Anne Fairweather says: “This is a timely contribution to the wider conversation about pension adequacy, particularly as the Pensions Commission considers how the system can support better retirement outcomes while remaining affordable for savers and employers. There are clearly no simple answers, but evidence like this will be important in helping the industry and policymakers understand the choices ahead and keep savers’ needs at the heart of future reform.”
Mercer UK’s Head of DC Product and now:pensions CEO Patrick Luthi says: “Mercer’s now:pensions has long campaigned for fair pensions for all, and we believe this report provides critical additional evidence for policy makers on the question of adequacy, affordability, and fairness. It should provide detailed analysis on the two core questions of how increasing auto enrolment default pension contributions impacts lower earners, and how flexibilities in the system, intended to tackle affordability challenges, might play out. The modelling, alongside qualitative research, offers key insights on these matters – as well as reflecting the perceptions of AE, pension saving, and the importance of a collaboration on a roadmap for any future change.”
People’s Pension head of policy Tim Gosling says: “This report highlights the difficulty in building a pension system based on defaults that is genuinely inclusive and shows that expanding automatic enrolment will create risks for some people. The question the report poses, is how those risks should be managed and who is best placed to bear them.
“Crucially, the report shows that people dislike the things that protect some lower earners from being defaulted into pension saving at a level that they cannot afford and do not need. It shows that the Commissioners may face a choice between what people support, and think is fair, and what may be in the best financial interests of lower earners.”