The pensions minister is set to defy calls to raise the minimum amount people must pay into a workplace pension, The i Paper can reveal, despite warnings that Britain is facing a crisis of retirement income.
Torsten Bell confirmed the minimum workplace pension contribution rate will remain at 8 per cent for the duration of this Parliament, even though the Government’s Pensions Commission is expected to recommend a rise of up to 12 per cent.
This is because current contributions are considered inadequate to meet a projected pensions crisis with an ageing population and those retiring in 2050 – aged in their mid-40s now – expected to have lower private pensions than those retiring now.
The current 8 per cent level is made up of a minimum 3 per cent contribution from employers. Raising the minimum amount would likely see the employers’ contribution also rising – at a time when many are saying they are struggling with staff costs due to recent national insurance and living wage rises.
Speaking to The i Paper at the Pensions UK annual retirement conference in Liverpool, Bell said ministers would wait for the Pensions Commission’s final report before deciding how to improve private pension provision.
Asked whether the Government accepted that the current rate was insufficient for millions of workers to secure an adequate retirement, and whether he would commit to increasing it, he said: “It’s not for me to prejudge the Pensions Commission but we’re not going to be making any changes in this Parliament.”
However, Pensions Commissioner Baroness Drake suggested at the same conference that the report was likely to recommend a rise. She said the “solution” to Britain’s pension crisis is “more saving” and that it is “clear the best route to delivering this” is through the automatic enrolment contribution rate.
“If employer contributions do not go up, how will we prevent millions from failing to save towards adequate retirement and avoid increasing reliance on means-tested benefits in old age by millions of people,” she said.
Bell added that any future changes would need to be clearly signposted and introduced gradually, rather than leaving workers and employers facing sudden increases in contributions.
Think-tanks and sector leaders have argued an increase in contributions would help workers build larger retirement savings, with proposals discussed in the sector including a 6 per cent contribution from employers.
Currently, under auto-enrolment, workers on over £10,000 a year will pay at least 8 per cent into a workplace pension – 5 per cent is made up of wages and 3 per cent from employers.
The system has brought millions of workers into pension saving, but questions remain over whether the minimum level of contributions is enough to provide an adequate income in retirement.
Former pensions minister under the Conservatives, Guy Opperman, told The i Paper earlier this week there is “no doubt that the UK automatic enrolment will get to 12 per cent; the better question is when”, adding: “If we got to 12 per cent by 2035, I’d be delighted.”
But Opperman, who served as minister from 2017 until 2022 and now works as a strategic adviser for the consultancy firm Aptia, warned that increasing the minimum auto-enrolment rate means employers and employees will be “paying more at a time when cost of living is tight”.
He said the Government is likely to take on the Pension Commission’s recommendation, but said: “the question is time”.
The debate over increasing the rate centres on how to help workers accumulate larger pension pots without placing an unaffordable burden on lower earners or employers.
Bell acknowledged that the wider private pension system was failing to deliver the outcomes workers needed, suggesting that increasing contributions was only one part of the challenge facing ministers.
He said: “The private pension system as it stands today clearly isn’t ticking the adequacy boxes as I broadly define them, and we need to make sure it does because private sector workers deserve pension.”
He argued that improving retirement incomes would require more than simply increasing the amount individuals save. The Government must also consider how pension schemes are managed and how effectively savings generate returns over time.
Bell warned that people retiring in the 2040s and 2050s could receive lower private pension incomes than today’s retirees if no action is taken.
He also highlighted the particular difficulties facing people who will still be renting when they retire. Unlike homeowners who have paid off their mortgages, private renters may need to cover housing costs throughout retirement, increasing the amount they need to save.
The issue is likely to form part of the wider debate about pension adequacy as the commission considers how to improve retirement outcomes for different groups of workers.
It comes as Andy Burnham announced changes to the triple lock – which sees the state pension currently rise by the highest of 2.5 per cent, average wage growth and inflation – removing the wage element.
Carl Emmerson, partner at London Economics and former deputy director of the Institute for Fiscal Studies (IFS), said: “Automatic enrolment transformed workplace pension saving. A challenge now is ensuring those employees brought into a workplace pension are contributing enough for their retirement.
“We cannot answer that challenge by looking at workplace saving alone. The state pension provides the foundation for retirement income, and its future level and uprating will directly affect how much people need to save privately.”
The Pension Commission is expected to publish its final report in February, with the Government expected to respond in the spring.
The Treasury has been contacted for comment.