Save, make, understand money


Could pension contributions rise to 12%?

Paloma Kubiak
Written By:
Paloma Kubiak

Calls have been made to increase pension auto-enrolment contributions to 12% over the next decade.

Pension auto-enrolment has been hailed a success as in the past 10 years since its inception, more than 10.6 million workers from two million employers are now saving into a workplace pension.

Before AE started, the workplace pension participation rate in the UK was 47%; after 10 years, that rate is now 79%.

Opt-out rates have also been “unexpectedly low”, even as minimum contribution rates had increased from 2% to 5% and to the current level of 8%.

But, the average total amounts paid into defined contribution pensions are still too low, according to the Association of British Insurers (ABI) – the trade association for the long-term savings industry.

Its Automatic Enrolment: What will the next decade bring? report stated: “The first 10 years of auto-enrolment have ensured millions more people will have greater retirement provision; the next 10 years should focus on making sure this provision is adequate.”

As such, it said it wants to see contributions rise from 8% to 12% over the next decade (split 6% each by employer and employee) but with recommendations that savers should have flexibility, including allowing them to opt-down to 10%. Alternatively, a minimum contribution could be set at 10% with the option to opt-up to 12%.

The ABI also urged the government to bring forward the commitments it has already made to extend automatic enrolment, by lowering the age threshold from 22 to 18, and reducing the earnings threshold so that contributions are made from the first pound earned.

Currently, auto-enrolment requires all employers to automatically enrol employees who are over the age of 22 and earn at least £10,000 a year into a workplace pension scheme.

The ABI’s proposed timeline would see the lower qualifying earnings threshold reduced to £4,160 in 2023, falling to £2,080 in 2024 and to £1 in 2025. Meanwhile in 2025 it wants to see the minimum age fall to 18, minimum contributions to total 10% (split evenly between employer and employee) in 2028 before rising to 12% in 2031.

‘We need a detailed plan for getting to higher contributions’

Hannah Gurga, director general at the ABI said: “Automatic enrolment has transformed workplace pension savings in this country. But the challenge remains to ensure people are saving enough for their retirement. For the next 10 years, we need a detailed plan for getting to higher contributions. Our report published today sets out the industry’s thoughts on how to achieve this – we stand ready to work with the government to ensure the next decade of automatic enrolment builds on the proud record of its first ten years.”

The report also highlighted other challenges, including that the self-employed aren’t eligible, as well as workers who may have multiple jobs earning over £10,000 but not £10,000 in a single job as per the rules.

Further, AE has led to “a proliferation of small pots” as people move from employer to employer, often leaving a small inactive pension pot behind them.

By the end of this year, the ABI expects there to be more than 11 million small, inactive pots. Without change, this figure will double again in the next 10 years, it warned. The issue here is that it makes it difficult for people to keep track of – though the pension dashboard should help once it is launched. Savings could also be eroded by fixed fees, and for the industry, they’re not “economically viable to administer for providers”.

Tom Selby, head of retirement policy at AJ Bell, said: “Setting in train a plan to gradually raise minimum contribution rates and ensuring a fair balance between employers and employees is a sensible approach. Baking flexibility into the contribution increases so employees aren’t left with an ‘all or nothing’ choice between retirement saving or not in the workplace should help reduce the risk of opt-outs spiking.

“Before that happens, the government needs to implement the recommendations of the 2017 auto-enrolment review, including removing ‘qualifying earnings’ bands so every pound earned qualifies for a matched contribution and reducing the minimum age from 22 to 18.

“Clearly this is hugely challenging against a backdrop of spiralling living costs, but every year of delay will exacerbate the risk of a future retirement crisis.”