Auto-enrolment contributions boost ‘could add £10bn a year’

Research by Phoenix and WPI Economics claimed that the increase in minimum contributions could mean a typical 18-year-old now saving an additional £96,000 into their retirement pot over the course of their working life.

However, delaying this increase by five years would reduce the total additional savings potential by nearly £10,000, and a 10-year delay would reduce the additional savings potential by around £22,000.

The findings were outlined in a new report entitled ‘Falling behind the curve’ by Phoenix Group and WPI Economics.

Andy Curran, chief executive officer of Standard Life, part of Phoenix Group, said millions of UK adults were not saving enough for their future retirement income, meaning it was crucial to have a plan to support greater pension saving throughout people’s working lives.

He added: “Increasing minimum auto-enrolment contributions is fundamental to addressing this challenge, particularly as many people are unengaged with their pension or have low confidence in their pension knowledge.

“Alongside the benefits for future retirement incomes, there is a wider economic benefit that pension capital can play in driving investment to sustainable and productive assets, ensuring optimal outcomes for savers remain at the centre of investment decisions.”

The research, which was published on Wednesday, builds on recommendations from the two organisations’ 2023 joint report entitled ‘Raising the bar: A framework for increasing auto-enrolment contribution’. This provided a suggested proposal for raising contributions and outlined the economic conditions necessary for doing so.

As well as boosting pension pots, increasing contributions could play a role in meeting the goals of the Mansion House Compact, Phoenix and WPI Economics said in their report.

The report’s model shows that a minimum contribution level of 12% would result in “total additional pension contributions of £10bn a year”.

The report suggested that each five-year delay to raising contributions could mean missing out on £2.5bn worth of investment into private equity and growth assets, based on a 5% allocation to unlisted equities.

With the launch of the report, Phoenix Group also called for a new “statutory requirement to support long-term pensions adequacy”. This would involve research into whether auto-enrolment savings levels are achieving “decent retirement outcomes”, Phoenix said, as well as how auto-enrolment saving interacts with the state pension.

The company also said work in this area “should include an assessment carried out by the government against economic indicators to decide whether the minimum rate should be raised”.

Gail Izat, managing director for workplace pensions at Standard Life, said: “While the success of auto-enrolment has laid a solid foundation, more needs to be done to help people secure a decent standard of living in retirement.

“The single biggest lever government can pull to achieve this goal is raising minimum contributions when the time’s right for savers and employers. Long-term savings adequacy underpins the financial wellbeing and security of individuals and could help contribute to the success of the wider economy, while employers also have a lot to gain from a financially stable workforce and the potential additional investment in the UK. 

“Without action, we risk exacerbating under-saving for people of working age as they move closer to retirement as well as depriving the economy of a highly significant line of finance. Raising contributions as soon as possible has benefits for all.”  

The Department for Work and Pensions recently opted not to change contribution levels or implement other measures aimed at expanding the reach of the auto-enrolment regime.

Further reading

The economic impact of higher contributions (12 February 2024)

No change: AE review raises more questions (6 February 2024)