MINIMUM CONTRIBUTIONS UNDER PENSION AUTO-ENROLMENT SHOULD RISE TO 12% OF ELIGIBLE SALARY BY 2020

03 January 2013

So says the Association of Consulting Actuaries (ACA).

IFA online reports:

The organisation’s Smaller Firm's Pensions Survey of employers with 250 workers or fewer found average combined contributions of 9% of salary for members of trust-based schemes and 7.5% for those in contract-based schemes.This is almost unchanged from the contribution levels of 2010 and only slightly higher than in 1996. Since 1996 average employer contributions have dipped slightly from 5.6% to 5.2% while employee contributions rose from 2.6% to 3.65%.

The ACA said the trend is alarming given lengthening life expectancy and the poor investment returns of recent years and called for minimum auto-enrolment contribution levels to reach 12% by 2020. It said an employee with average earnings who started saving at 30 would need to make contributions of 16% of total salary to achieve a two-thirds replacement rate at retirement.

ACA chairman, Andrew Vaughan said auto-enrolment would lead to a "sea-change" as the three quarters of smaller firms without a scheme would have to start enrolling staff by 2018 at the latest. However, he warned the auto-enrolment combined contribution rate of 8% of earnings between £5,564 and £42,475 would result in a retirement income of less than half of salary for most people.

"Before 2018 we need to firmly address how we can get more people to save much more so they have a sufficient income in retirement," he said.

The majority of respondents to the survey said reducing National Insurance contributions would be the best way to boost employer contributions voluntarily, followed by cutting red tape or lowering corporation tax. The most popular options for increasing employee contributions were cuts to NI and income tax, followed by clearer disclosure of charges, a star rating system for schemes and money-back guarantees.

Vaughan said: "I would like to see the government and opposition pledge to raise minimum pension contributions on band earnings to 10% by 2015 and 12% by 2020, but with pledges to cut National Insurance, earmarking reductions so they support extra private pension savings. If we do not increase these minimum contributions, then government ambitions to hold down state welfare costs are unlikely to materialise; indeed, the pressure will be in the other direction."