IFS requires minimal employer pension contribution

Employees should receive a 3 per cent employer pension contribution regardless of whether they contribute themselves, the Institute for Fiscal Studies has said.

Women, those working part-time, young adults and lower earners would particularly benefit, the IFS said, arguing there is a ‘strong case’ for bringing in the change.

Instituting a 3 per cent contribution could help address the near quarter of employees who either opt out of auto enrolment or are not automatically enrolled due to their earnings being too low.

Seven million private sector employees are expected to see their pension fall short of minimum requirements

Fewer than 50 per cent of private sector workers who save into a pension contribute more than the minimum 8 per cent, according to the research by the IFS in partnership with the Abrdn Financial Fairness Trust.

Between 30 and 40 per cent of private sector employees, equating to between 5 and 7million people, are on course to see their defined contribution pension fail to meet the requirements for a minimum standard of living.

This doesn’t account for a partner’s pension or potential future inheritances.

Laurence O’Brien, a research economist at IFS and an author of the report, said: ‘Too many private sector employees appear on course to end up on a low – or disappointing – retirement income.

‘While there is often concern about savers not saving enough, an additional problem is that despite automatic enrolment boosting workplace pension membership, more than one in five private sector employees are still not saving in a pension.’

Currently, employers are required to automatically enrol employees aged between 22 and the state pension age, provided that they earn more than £6,240. 

Pension contributions must be at least eight per cent of the employee’s salary, with the employer paying five per cent and the employee three per cent.

The IFS said the auto-enrolment age range should be lowered from 22 to 16, and that the upper limit should be increased to 74 from state pension age, currently 66.

While the IFS said there may be a risk of more workers choosing to opt out of contributing themselves and instead relying on the minimum contribution from their employer, it suggests testing the idea with a trial beforehand.

The IFS said: ‘Compared with other ways of increasing employer pension contributions, it would be less likely to suppress wages for lower-paid employees receiving additional contributions.’

Mubin Haq, chief executive of the Abrdn Financial Fairness Trust, said: ‘Guaranteeing three per cent from the employer regardless of whether an employee makes a contribution could boost employer pension contributions by £4billion per year. 

‘This would particularly benefit women, those working part-time, young adults and the low paid.’

The institute also proposed that there should be a 12 per cent default contribution for earnings above £35,000, with the extra coming from employee contributions, as well as an increase to the upper limit of qualifying earnings of £50,270.

The IFS said: ‘The real value of this limit has fallen significantly in recent years.’

However, it said those facing higher default contributions should be given the option to ‘opt down’ to the current minimum contribution.

Jamie Jenkins, director of policy at Royal London, said: ‘The nation is facing up to a ticking time bomb, with increasing numbers of people heading towards retirement with inadequate savings. 

‘This isn’t simply a societal issue, but an economic challenge. 

‘People should be able to retire with dignity, rather than feel they enter later life viewed as a burden on the working population.’