Increase default auto-enrolment contributions to help people save for retirement

There is a growing body of research that shows many people are not saving enough for retirement and could face poverty in old age. Phoenix Insights modelling suggests currently half of DC savers are not on track for the income they expect. This equates to around 14 million people. And they are not just slightly ‘off track’. The average size of the saving gap for this group is at £337,000 and for 68% of them the gap is bigger than £100,000¹. We want people to have the best opportunity of having financial security later in life. If we don’t increase contributions rates, more people will fall short of their desired retirement income.

A consensus is forming that increasing default contributions from 8% to 12% is required.

Saving more into pensions through increasing both employer and employee contributions will make all the difference to ensure people can have a comfortable income in retirement. The timing of these increases will need to take into account the wider economic climate and most crucially how it will affect household budgets.

That’s why we partnered with WPI Economics to create a framework that outlines a roadmap for implementing the increase, as well as understanding the costs to individuals and the economy if this is delayed. The reports also provide some suggestions and solutions as to how policy makers might set about increasing contributions, when the economic conditions are right.

Delaying an increase costs individuals and the economy

Our new research shows that:

• For every 5 years of delay, we will lose £11.5 billion of investment in UK listed equities, £2.5 billion further in unlisted equities, an additional £2.5 billion in infrastructure and real estate.
• Any benefits to 45-year-olds of increasing contributions, a group that is at high risk of under-saving, will mostly disappear after a 15-year delay, and 30% of it disappears after a 5-year delay.
• If there were to be a significant housing cost increase for today’s retirees, it would increase the poverty rate for pensioners by 1.3%, leading to an extra 145,000 pensioners in poverty. Furthermore, it would increase spending on housing benefit by £3.5bn.

Our auto-enrolment framework

Our framework was developed alongside a wide range of stakeholders from across different sectors of the economy and sets out a series of tests for determining the economic and financial conditions which will allow for contributions to increase from 8% to 12%. These tests should be considered to ensure any future increases to contributions are sustainable and affordable. It was designed around the following principles:

1. Pensions are a form of remuneration, and part of the employer’s payroll cost so the metrics to determine increases to default AE contributions should relate to (a) pay and earnings and (b) the costs of employment.
2. There should be a limited number of metrics for simplicity.
3. There is a clear policy need to increase contributions in auto-enrolment. The framework should facilitate an increase at the right time a pace.
4. The framework should provide clarity and certainty for businesses.

Call for an adequacy review and action plan

Increasing AE contribution requires both strong evidence and consensus from all stakeholders including businesses and savers. We recommend the next Government to conduct a review on long term pensions adequacy, covering both private and state pensions, at the earliest possible opportunity. Once the need to change is agreed it should be followed by concrete actions, including annual assessments against economic indicators proposed to kick-start the journey.

The initial review should consider:

• How we manage the short-term costs to households and businesses, along the lines of the Framework set out in ‘Raising the Bar’
• The costs of delaying action – for savers, the national economy, and the benefits system – highlighted in ‘Falling behind the curve’.
• How this interacts with wider provision, in particular the role of the State Pension and of Pension Credit.

Download the full reports below to find out more about our framework to introduce increase to AE contribution, and the costs of delaying to individuals and economy.