The Commission’s interim report, Pensions 2050: evidence and future priorities, finds that higher rates of private pension saving are needed to make sure low and middle earners have enough for an adequate retirement in later life. It concludes this will be best secured through the automatic enrolment system.
With the Commission now inviting feedback, the ABI has set out how reforms to automatic enrolment could address the UK’s significant levels of under-saving.
Increasing minimum automatic enrolment rates to 12% to boost pension pots by 50%
The ABI’s latest report, Pensions Adequacy: Housing, Households and Auto-Enrolment, researched by the Pension Policy Institute, found that raising minimum contribution rates to 12% would have the largest impact on improving saving levels among employees earning above £18,700. It has proposed splitting contributions equally among the employee and employer, resulting in a 1% rise for the employee and a 3% rise for the employer from current levels.
The analysis found that this increase would boost a median earner’s eventual pension pot by 50% over the course of their employment.
Any increase should be introduced gradually over time
The ABI recognises that households and businesses continue to face significant financial pressures and that any increase in pension saving must be introduced carefully. The Commission's final recommendations should therefore set out a clear plan for improving retirement adequacy. This plan should address auto-enrolment eligibility rules and thresholds, as well as contribution levels, and include a clear timetable and phased approach to implementation so that all stakeholders can plan ahead.
As the original roll-out of automatic enrolment demonstrated, careful phasing can help employers adapt to additional costs, limit impacts on take-home pay and support continued participation in pension saving. In this context, the ABI believes there should be an ambition to gradually introduce increased automatic enrolment contributions of 12% by the end of the 2030s.
The next phase of pension reforms will also need to command broad consensus if it is to stand the test of time. Achieving lasting change will require government, the pensions industry, employers and unions to work together to improve retirement outcomes.
Reform earnings limits to help low earners save more and higher earners save enough
The ABI has urged the Commission to consider changes to the Lower Earnings Limit (LEL) and Upper Earnings Limit (UEL). Currently standing at £6,240 and £50,270 respectively, these amounts are the minimum and maximum level of earnings eligible for automatic enrolment pension contributions.
The trade body has suggested gradually lowering the LEL to £0 to enable eligible workers to begin saving into their pension from the first pound. This has been found to improve outcomes for low-paid workers as it increases the part of their pay that is pensionable. Under the current system, some low-paid and part-time workers are only saving 3% of their total pay. Removing the limit is predicted to increase their eventual pension pot by 18% on average. Legislation to do this is already in place.
Uprating the UEL to £65,700 would mean it reaching the level it would have done had it not been frozen at £50,270 since 2021/22 which has meant that 600,000 employees are currently contributing less than 8% of pay. Instead, the UEL should be uprated gradually to £65,700 and then annually in line with average earnings so that pension contributions keep track rather than fall as a proportion of earnings. This will make sure higher earners are saving enough to secure an adequate retirement.
Lower the eligibility age to 16 over time
The ABI is also advocating for lowering the age when workers become eligible for a workplace pension from 22 to 16. This is because legislation to do this is already in place, and the benefits of starting to save early are well established.
HMRC to examine how to streamline pension savings for self-employed people
For self-employed workers, saving rates are far below what is required. Just 17% of self-employed workers currently save into a private pension, which falls to just 4% for those who earn only from self-employment. These savers do not benefit from employer contributions, payroll deductions or the ease of the automatic enrolment system.
In its response, the ABI has urged the Commission to make a recommendation to the Government to explore what changes could be made through the self-assessment system to help more people save. One proposal for extending pension saving to the self-employed would be to use HMRC's Self-Assessment system, allowing pension contributions or default pension-saving choices to be integrated into annual tax returns.
Dr Yvonne Braun OBE, Director of Long-Term Savings & Health and Protection Policy at the ABI: “Automatic enrolment has been one of the great public policy successes of recent decades, helping millions more people put money aside for later life. But while the current 8% contribution rate was the right place to start, evidence increasingly shows it will not be enough on its own to deliver the retirement incomes many people expect and need.
“The question is no longer whether pension saving needs to increase, but how we get there. The destination is important, but so is the journey. Any increase in contributions must be gradual and predictable, ensuring it remains affordable for both employers and employees.”
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