Ministers should raise employee and employer pension contributions, with a recommendation of a minimum level of 12 per cent under serious consideration by the second Pensions Commission, The i Paper understands.
Pensions commissioner Baroness Jeannie Drake 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.
She said the commission is “still working” on how to support lower earners and those in “relatively stressful circumstances” – including private renters – after the Government recently asked it to “look at lower income people”.
Currently, the default workplace pension contribution rate is 8 per cent, which includes a minimum contribution of 3 per cent from employers. Think-tanks and sector leaders have long called for the total pension contribution rate to rise gradually to 12 per cent – with employers contributing 6 per cent – to help people build up their retirement savings.
But this is not considered adequate 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.
‘Finish the job’
It is understood the Pensions Commission has not settled on a final figure to recommend, or how much of it should be covered by employers, but increasing the auto-enrolment contribution rate is part of the commission’s mission to “finish the job” started by Adair Turner.
He led the first Pensions Commission and proposed a low-cost nationwide pensions savings scheme which automatically enrolled people in 2005, which the former Labour government enacted under the 2008 Pensions Act.
But the move could cause backlash from businesses, which would be forced to pay an additional £9.8bn if total contributions were increased to 12 per cent on all earnings, with 6 per cent of this coming from employers, according to analysis by the Institute for Fiscal Studies (IFS).
Speaking during a keynote address at the Pensions UK conference in Liverpool, Baroness Drake signalled that the commission will recommend that employers should take on part of the burden.
“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.
She said the commission is considering how to boost retirement savings for people on low incomes.
Ministers have the option of removing the current £6,240 lower earnings threshold for automatic enrolment, meaning contributions would be calculated from the first pound earned rather than only on income above that level. This would be one way of increasing savings for lower earners and part-time workers.
Former minister: ‘I’d be delighted if we get there by 2025’
Former pensions minister under the Conservative government, Guy Opperman, said 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.”
Opperman, the Tory pensions minister from 2017-2022 who 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”. Any changes would have to come after the next general election, which is currently due by 2029 at the latest, as the Government has explicitly ruled out increases in contribution rates for the rest of this Parliament.
Last month, the House of Commons Work and Pensions Committee said the Government had no current plans to increase minimum contributions, although its Pensions Commission is examining the long-term adequacy and fairness of the system.
But there have long been calls for the minimum rate to increase to 12 per cent. Pensions UK said the Government must set a clear timetable to increase the automatic enrolment contributions to 12 per cent, shared equally between employers and employees.
The IFS has proposed a targeted 12 per cent default total contribution rate specifically for earnings above £35,000, rather than a blanket increase for all workers, to protect low-income workers from reduced take-home pay.
The respected think-tank has also suggested that the age range targeted by automatic enrolment should be expanded from 22 to 16 to “help even more in paid work save for later life”.
London Economics think tank called for a “hybrid approach” where mid-earners should increase their contributions to 12 per cent, but lower earners should be “protected”.
Speaking at a Pensions UK conference in Liverpool, Carl Emmerson – partner at London Economics think-tank and former deputy director of the IFS – suggested a “phased increase” in the default pension contribution rate to 12 per cent of qualifying earnings for middle earners, with the option to opt down to 8 per cent. The proposal applies to people earning between £25,000 and £65,000.
Baroness Drake warned that increasing automatic enrolment contributions “won’t be without difficulties, although it’s necessary”.
Trade-offs over more saving
“More saving is not costless,” she said. “There are trade-offs for all three key parties: the state will spend more on tax; employers will have to plan for changes to their overall remuneration budget, and some individuals will have lower take-home pay for a period.”
She said there are currently 15 million “under-savers” in the UK, which would grow to 19 million “without action” – accounting for half the working age population. She noted the UK has the lowest savings rate in the G7 and it has worsened since the pandemic.
“Everyone has to play a part in responding to this challenge because when we identify the solution, it has to hold over the long term,” she said. “Pensions, ageing populations are a 30-40 year project. It’s not one to be altered arbitrarily every so often.”
“In 20 years’ time, I don’t want members of another commission in 2050 to be standing in front of a Pensions UK conference reminding us of a lost opportunity. This is a once-in-a-generation opportunity to finish Turner’s job,” she added.
Zoe Alexander, chief policy officer at Pensions UK, said: “With the Second Pensions Commission finalising the package of proposals that will form its final report due next Spring, we are approaching crunch time for political decision-making on pensions adequacy.
“Increasing automatic enrolment contributions to 12 per cent, shared equally between employers and employees, is the right decision to deliver long-term household financial security, something this Government has said it cares deeply about.
“Our research shows the public understand that under-saving is a serious national challenge, and employers are much more open to higher contributions when changes are phased and clearly signalled.
“Now is the time to set a timetable. Delaying reform risks consigning future generations to low retirement incomes and benefit dependency.”
A Department for Work and Pensions spokesperson said: “The Government recognises that millions are not saving enough for their retirement. That is why last year we revived the Pensions Commission to review our pensions system as a whole for the next parliament.
“The Commission is examining how we can ensure secure retirements for tomorrow’s pensioners and it will publish a final report and recommendations in early 2027.”