Since its introduction just over a decade ago, automatic enrolment has undoubtedly transformed retirement savings in the UK, allowing millions of workers to effortlessly save for their future. Seventy-nine per cent of employees – 22.6 million people – now contribute to a workplace pension, an increase from 47 per cent prior to auto enrolment’s inception in 2012. That is a significant achievement.
However, a growing body of research shows many people are not saving enough for retirement. Fourteen million defined contribution pension savers are not on track for the retirement income they expect. We must acknowledge – as they have in Australia, where the minimum pension contribution is 11 per cent, rising to 12 per cent in 2025 – that in the UK the current contribution level of 8 per cent is simply insufficient to adequately provide for individuals in retirement.
Increasing employer and employee contributions will make all the difference to ensuring people can have a comfortable income in retirement, but of course these are challenging times for both savers and businesses. While now is not the moment to increase contributions, we need to ask how and when contributions might increase to ensure better retirement outcomes.
In November last year, Phoenix Group published a report with WPI Economics setting out how policymakers might go about this when the economic conditions are right. Developed with a range of stakeholders from across the economy, it proposes a framework for how automatic enrolment contributions may rise in the future and, crucially, what economic criteria should be met so as not to place too great a strain on business and the individuals. It also establishes criteria to pause such increases should the economy be stalling.
The government has scheduled to review and implement multiple changes to pensions in the mid-2020s, including both the state pension age and automatic enrolment qualifying criteria. We therefore believe a review of pensions adequacy – covering both state and private pensions – is now vital. The next parliament will be a golden opportunity for the government to conduct a review to ensure all existing and new policies deliver a suitable level of retirement income.
If we continue on the current trajectory, the repercussions will be severe. The strain on social support systems and the potential increase in poverty among those in retirement are issues that we can’t ignore. And the benefits will mean better outcomes for individuals and the economy. Modelling from WPI Economics shows that increasing auto-enrolment contributions to 12 per cent could lead to a typical 18-year-old today having an extra £96,000 in their pot at retirement. Increasing automatic enrolment contributions to 12 per cent will add £10bn to pension savings annually, which will inject more investment into the UK economy.
As we approach the general election, it is imperative we start to address the problem of insufficient pension savings. The urgent need to increase contribution levels is evident, and the future implications of inaction are too significant to overlook. The next government must commit to a review of pensions adequacy in the next parliament to make retirement security a reality for every UK citizen.
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