Larger employers would support lifting auto-enrolment contributions to a median total level of 12%, with employees contributing at least 6%, a new survey has found, but smaller businesses remain opposed to contribution increases. 

 

Should the government decide to increase minimum pension contributions, the median acceptable level supported by employers would be a minimum total contribution of 12%, with a minimum employee contribution of 6% of total earnings, the Association of Consulting Actuaries has found in its survey. 

 

However, the survey also found that smaller firms remain opposed to seeing any further increases in minimum contributions. Most employers (84%) also thought the introduction of the new social care levy makes it unlikely that contributions would be increased during this parliament. 

 

“Our survey found British business is rightly worried that we’re not saving enough and supports increasing auto-enrolment minimum contributions,” said ACA chair Patrick Bloomfield.  

 

“The government’s inaction in this policy area is particularly concerning.  We are seeing millions of workers in DC schemes ‘sleepwalking’ towards levels of income in retirement in the years ahead that will fall far short of the incomes of millions of current pensioners who have benefitted from defined benefit arrangements,” he said. 

“Without a plan for increasing saving levels, the younger generation of taxpayers of tomorrow will face enormous bills to support the elderly in retirement, dwarfing the extra funds recently allocated to social care,” Bloomfield warned. 

The Investing and Saving Alliance has also called for higher contributions. Analysing new data by the OECD, it said the replacement rate of pensions in the UK had slipped slightly to 58.1% from 61% if auto-enrolment is included alongside the state pension. It also noted that auto-enrolment covers less than half of the UK's working age population.

Its head of retirement Renny Biggins said if the UK is to continue to improve its pensions provision, "we must do the following: honour the ‘triple lock’ in future years to ensure pensioners are no worse off in real terms; improve our standing with our OECD counterparts – the triple lock alone will not achieve this and increased AE contributions will be required; finally, ensure that future review and changes to the State Pension take in to account the overall retirement income targets that are deemed appropriate and the impacts this has on AE’s ability to deliver on the income level that will be required from private pension provision.”

 

 

In line with recommendations made in 2017, the government agreed that it should remove the lower earnings band threshold so contributions are made from the first pound earned, and to lower the age at which pension saving starts from 22 to 18; it said it aims to introduce the reforms in the “mid-2020s”.  

 

While industry associations like the ACA and the Pensions and Lifetime Savings Association have been calling for the government to increase minimum auto-enrolment contributions to 12% and share the burden equally between employers and employees, there is currently no plan to do so. Under current rules, employers have to contribute at least 3% and employees 5%  to pensions. 

 

Median combined employer and employee contributions to DC master trusts are already at 12% of total earnings; they are still much lower than median contributions to defined benefit schemes, which increased to 29–33% of earnings excluding deficit contributions, indicating that future pensioners are likely to experience a sharply lower level of lifestyle in retirement than their parents or grandparents did. 

   

   

Worryingly, the survey also showed that the pandemic has led more people to stop saving; the number of employers seeing auto-enrolment cessation rates go up substantially doubled to one in five, from previously one in 10. 

 

 

Taxation was singled out as another area requiring reform. Of the responding employers, nine in 10 (89%) said the current structure is too complicated and needs simplification – even if that means some people will be worse off as a result. 

 

“The ludicrous complexity of pensions tax is also preventing Britons from saving. It is time for a root and branch review, to get us saving for our futures. Again, no action has been taken,” said Bloomfield. 

 

The ACA has made seven recommendations to address the multiple areas it singled out for improvement. It wants the government to start work on the following: