WTW urges higher default contribution levels to boost saving

Employers should look to increase the default contributions into pension funds when auto-enrolling staff, as part of measures to improve pension adequacy, according to WTW.

While many companies match contributions up to “generous” levels, the company said, the default level is usually set at the statutory minimum.

In a new report, WTW warned that lower contributions risked “widespread pensions inadequacy for many employees” in defined contribution (DC) schemes.

Rather than leaving it to employees to “opt up” to higher contributions, WTW said staff should be given higher contributions as a default and offered the option of reducing these if affordability became an issue.

Helen Gilchrist, head of DC consulting at WTW and author of the report, said: “Enrolling employees into DC schemes at a higher default level is one very practical way of addressing long-term adequacy issues.

“Individuals should be free to proactively lower their contribution levels if needed whilst remaining compliant with auto-enrolment rules. But we know that even those that can afford to contribute more, and know they should, often need encouragement in order to do so.

“Most people assume that the default contribution level at which they are enrolled will be adequate for their needs, which we know is currently not likely to be the case.”

According to research by the Pensions and Lifetime Savings Association, more than half of the UK population risk failing to hit the “target replacement rate” set by the 2005 Pensions Commission – approximately two thirds of pre-retirement income for a median earner.

WTW’s report also highlighted the importance of investment strategy design to ensure people take “enough investment risk at the right time”.

The organisation also highlighted decumulation options. Following the announcement of the Mansion House reforms last year, the Department for Work and Pensions launched a consultation on decumulation options for DC, which closed in September.

WTW said that work in this area, plus the development of potential collective defined contribution decumulation options, should provide support for members as they decide how to access their retirement savings.

“The retirement adequacy issue in the UK requires immediate attention,” Gilchrist said. “By saving more, maximising returns, and making better retirement choices – together with continued efforts to improve financial literacy and education throughout the UK – retirement outcomes can be significantly improved for millions of people.”