Urgent action is required to address pensions adequacy

Since its introduction just over a decade ago, automatic enrolment has undoubtedly transformed retirement savings in the UK, allowing millions of workers to effortlessly save for their future.  Some 22.6 million people now contribute to a workplace pension, an increase of 47 per cent before auto enrolment’s inception in 2012. That is a significant achievement.

However, a growing body of research shows many people are not saving enough for retirement. Some 14 million defined contribution pension savers are not on track for the retirement income they expect. We must acknowledge – as they have in Australia – that the current contribution level of 8 per cent is simply insufficient to adequately provide for individuals in retirement.

Contributing more through employer and employee contributions will make all the difference to ensure people can have a comfortable income in retirement, but of course these are challenging times for both savers and businesses. While now is not the time to increase contributions, we need to ask how and when contributions might increase to ensure better retirement outcomes.

Last November, Phoenix Group published a report with WPI Economics setting out how policy-makers might set about doing this, when the economic conditions are right. Developed with a range of stakeholders from across the economy, it sets out a framework for how automatic enrolment contributions may rise in the future and, crucially, what economic criteria should be met so as not to place too great a strain on business and individuals. It also establishes criteria to pause increases should the economy stall.

The government plans to review and implement multiple changes to pensions in the mid-2020s, including both the state pension age and automatic enrolment qualifying criteria. We therefore believe a review of pensions adequacy – covering both state and private pensions – is vital. The next parliament will be a golden opportunity for a new government to conduct a review to ensure all existing and new policies deliver a suitable level of retirement income.

If we continue on the current trajectory, the repercussions will be severe. The strain on social support systems and the potential increase in poverty among those in retirement are issues that we can’t ignore. And the benefits will mean better outcomes for individuals and the economy. Modelling from WPI Economics shows that increasing auto-enrolment contributions to 12 per cent could lead to a typical 18-year-old today having an extra £96,000 in their pot at retirement. Increasing automatic enrolment contributions to 12 per cent will add £10 billion to pension savings annually, which will inject more investment into the UK economy. 

As we approach the general election, it is imperative we start to address the problem of insufficient pension savings. The urgent need to increase contribution levels is evident, and the future implications of inaction are too significant to overlook. The next government must commit to a review of pensions adequacy in the next parliament to make retirement security a reality for every UK citizen.