Research & insights

A framework for increasing auto enrolment contributions

Research & insights

A framework for increasing auto enrolment contributions

Helping people save enough to have the retirement they want

Woman Working In Her Small Business

Since its introduction just over a decade ago, pension automatic enrolment has transformed retirement savings in the UK, allowing millions of workers to effortlessly save for their future. The latest available data shows 79% of employees – 22.6 million people – contribute to a workplace pension, an increase from 47% prior to auto-enrolment’s inception in 2012. That is a significant achievement. The focus now needs to shift away from getting people to save, and towards whether they are saving enough.

Increase default auto-enrolment contributions to help people save for retirement

There is a growing body of research that shows many people are not saving enough for retirement and could face poverty in old age. Phoenix Insights modelling suggests currently half of DC savers are not on track for the income they expect. This equates to around 14 million people. And they are not just slightly ‘off track’. The average size of the saving gap for this group is at £337,000 and for 68% of them the gap is bigger than £100,0001. We want people to have the best opportunity of having financial security later in life. If we don’t increase contributions rates, more people will fall short of their desired retirement income.

A consensus is forming that increasing default contributions from 8% to 12% is required.

Saving more into pensions through increasing both employer and employee contributions will make all the difference to ensure people can have a comfortable income in retirement. The timing of these increases will need to take into account the wider economic climate and most crucially how it will affect household budgets.

That’s why we partnered with WPI Economics to create a framework and provide some suggestions and solutions as to how policy makers might set about increasing contributions, when the economic conditions are right.

Helping people to prepare for retirement

All stakeholders in the pensions system should work together to ensure the framework is adopted. An agreed approach can underpin a consensus for building better retirement outcomes in the decades to come.

Our auto-enrolment framework

Our framework was developed alongside a wide range of stakeholders from across different sectors of the economy and sets out a series of tests for determining the economic and financial conditions which will allow for contributions to increase from 8% to 12%. These tests should be considered to ensure any future increases to contributions are sustainable and affordable. It was designed around the following principles:

  1. Pensions are a form of remuneration, and part of the employer’s payroll cost so the metrics to determine increases to default AE contributions should relate to (a) pay and earnings and (b) the costs of employment.
  2. There should be a limited number of metrics for simplicity.
  3. There is a clear policy need to increase contributions in auto-enrolment. The framework should facilitate an increase at the right time a pace.
  4. The framework should provide clarity and certainty for businesses.

Download the full report to find out more about our framework including recommendations about how and when it should be implemented.