Calls to raise auto enrolment minimum

The UK is under-saving for retirement. While auto enrolment has helped millions of people put more into their pension pots, it's widely recognised that the current minimum contribution rate of 8% is not high enough to ensure a comfortable retirement.

Increasing the default pension contribution rate would boost many people's income in retirement, while also benefiting the economy through greater pension fund investments. But the longer this change is delayed, the less it will benefit today's workers, a new report says.

£10bn increase to pension contributions

Half of defined contribution pension savers are not on track for the income they expect, according to modelling by Phoenix Group's longevity think tank, Phoenix Insights.

'Falling Behind the Curve', by Phoenix Group and WPI Economics, suggests that increasing the minimum auto enrolment contribution rate from 8% to 12% could result in total additional pension contributions of as much as £10bn a year.

For a typical 18-year-old on median income, this change could lead to an extra £96,000 in their pension at retirement, or £64 more per week. If the policy change was delayed by 15 years, they would have an extra £61,000.

A typical 35-year-old would have an extra £44,000 in their pension at retirement, or £29 more per week, if this increase was made immediately, or £18,000 if delayed by 15 years. And a typical 45-year-old would have an extra £33,000, or £24 more per week, or £8,000 if delayed.

"Millions of UK adults are not saving enough for their future retirement income, so it is crucial we have a plan to support greater pension saving throughout people's working life," said Andy Curran, CEO of Standard Life, part of Phoenix Group. "Increasing minimum auto enrolment contributions is fundamental to addressing this challenge, particularly as many people are unengaged with their pension or have low confidence in their pension knowledge."

Pensions and savings manifesto

This call was echoed by the Association of Consulting Actuaries (ACA), which recently issued its own pensions and savings manifesto ahead of the general election.

The representative body for UK consulting actuaries urged the political parties to focus on a "narrow, achievable and deliverable list of priorities" to ensure that today's working generations build adequate levels of pension saving.

Research published by the Department for Work and Pensions last year found that around two in five working age people are undersaving for retirement -- equivalent to over 12.5 million individuals.

"Auto enrolment, whilst a success in terms of restoring and extending coverage, will not provide the level of income most savers expect," said ACA chair Steven Taylor.

The ACA set out a series of potential policy initiatives including:

• Boosting the minimum auto enrolment contribution to at least 12% in phases over the next 10 years, with costs shared between employers and employees.
• Expanding the scope of auto enrolment to include the self-employed and those engaged in the 'gig economy'.
• Introducing flexible, tax efficient 'sidecar' savings to encourage an increase in voluntary savings above auto enrolment limits while allowing access for resilience needs.
• Greater support for risk pooling arrangements such as collective defined contribution.

Taylor added that unless such measures are implemented, almost half of working age people in the UK are on course for financial disappointment in retirement or may end up working for far longer than they currently expect.

Biggest lever

The single biggest lever the government can pull to help people secure a decent standard of living in retirement is raising minimum contributions when the time is right for savers and employers, said Gail Izat, managing director for Workplace Pensions at Standard Life.

"Long-term savings adequacy underpins the financial wellbeing and security of individuals and could help contribute to the success of the wider economy, while employers also have a lot to gain from a financially stable workforce and the potential additional investment in the UK.

"Without action, we risk exacerbating under-saving for people of working age as they move closer to retirement as well as depriving the economy of a highly significant line of finance. Raising contributions as soon as possible has benefits for all."