Employers should consider enrolling new employees at higher pension contribution levels to improve retirement outcomes, consultancy WTW has said in a new paper. The firm also argues investments should be higher risk and retain risk for longer as ‘cliff-edge’ retirements are becoming less common.  

WTW's paper, ‘What can the UK do to ensure future retirement adequacy?’, notes that while many companies offer DC contributions that go beyond the legal minimum, they leave it to employees to take action if they want to benefit from those, enrolling new joiners at the minimum level. The minimum auto-enrolment contribution level is 5% from employees and 3% from the employer. The PLSA has been calling for minimum auto-enrolment contributions of 12%, split evenly between employees and employer. 

WTW says lack of awareness and inertia mean that many employees do not up their contributions, often forgoing ‘free money’ from the employer’s matching arrangement. It argues that these missed contributions lead to lower retirement savings and a “real risk of widespread pensions inadequacy for many employees”. 

"The retirement adequacy issue in the UK requires immediate attention. WTW is considering some bold initiatives to address the issue in a wider context but, in the meantime, there are practical steps that can be taken to ensure DC savers have a secure and comfortable future in retirement,” said head of DC consulting Helen Gilchrist.  

“Enrolling employees into DC schemes at a higher default level is one very practical way of addressing long-term adequacy issues. Individuals should be free to proactively lower their contribution levels if needed whilst remaining compliant with auto-enrolment rules,” she added.  

The paper recommends introducing a higher default contribution rate under auto-enrolment, suggesting 12%, with an ‘opt-down’ mechanism to no less than 8%.  

In addition to encouraging people to save more, WTW also suggests investing mainly in growth-seeking assets, naming equities and private market investments, during the early years of saving, and to retain exposure to these assets for longer. 

The consultancy also stresses that people need guidance or advice on how and when to spend their DC pot, and that this should “at the very least” be facilitated by the provider, trustee or employer. 

The Pension and Lifetime Savings Association found in 2022 that 13.6m people are at high risk of not saving enough to achieve the target replacement rate set by the Pensions Commission, which first proposed automatic enrolment in the early 2000s. Around half (51%) of savers are on track to meet the TRRs, but this falls to just 3% for people who only have defined contribution pension savings, according to the PLSA. The commission suggested a 67% replacement rate for a median earner, a higher target for low earners and a lower one for higher earners. 

Should employers enrol people at the maximum contribution with an opt-down?