Pension contributions need to increase to at least 12%

28 November 2016

The Pensions and Lifetime Savings Association (PLSA) has published new research analysing the incomes different UK generations can expect in retirement.

Retirement Income Adequacy: Generation by Generation reveals that automatic enrolment will deliver a real improvement in the retirement outcomes of millions of people in the UK, but there is still room for improvement. Of the 25.5 million people in employment:

  • 1.6 million people, are still at high risk of falling short of a minimum income standard (MIS) in retirement; and
  • 13.6 million people, are still at risk of not meeting their target replacement rate (TRR).

Graham Vidler, Director of External Affairs, PLSA, commented:

“…For younger savers increasing their automatic enrolment contributions from 8% to 12% and working slightly longer puts them on track for their target replacement rate. For older workers, who have less time to save, achieving their target replacement rate may also require a choice to save more and using other assets, such as property, if they have them.

It is clear from our analysis that minimum contributions under automatic enrolment need to increase to at least 12%. The precise level, the timing of the change and the balance between employer and employee contributions are issues which need to be fully thought through in the light of the effects of increases in contributions due in 2018 and 2019.

The 2017 review is an opportunity to start working towards this next phase of automatic enrolment. The success of automatic enrolment to date has been underpinned by wide consensus and support as established by the Pension Commission. To ensure the next phase of automatic enrolment builds on this success the Government should begin by creating an independent commission.”

The PLSA recommends the remit of an independent pension commission should cover three areas.

  1. Review existing measures of adequacy and make recommendations for a national standard, or standards, which reflect the changing nature of retirement.
  2. Make recommendations for increasing minimum contribution levels to at least 12% of qualifying earnings, including how and when this change should be made, and how it should be divided between worker and employer contributions.
  3. Make additional recommendations to improve the situation of older savers who have less time to benefit from an increase in contribution rates.

To address the shortfalls in projected retirement income the PLSA explored how a number of adjustments to the parameters of saving might alter the outcomes for those who are eligible for automatic enrolment (AE) in a DC workplace pension. The full press release contains four very relevant CASE STUDY MODELS.