Introducing flexible approaches to auto-enrolment contributions risks introducing complexities and would not be popular among savers or employers, according to a major study led by Pensions UK.
The trade body has long campaigned for the minimum default contribution level to be raised to 12%, up from 8% currently, to help address adequacy concerns. However, doing so raises affordability concerns for employers and for savers, especially given recent high levels of inflation affecting the cost of living.
However, Pensions UK’s new research suggests that more flexible approaches could introduce unwanted complexity and raise the risk of accidental non-compliance with auto-enrolment rules.
The report, written by independent researcher Jackie Wells, includes research from the Pensions Policy Institute, consumer studies from Counterpoint Research, and interviews with pensions industry professionals and payroll and HR staff.
Matthew Blakstad, deputy director for strategic policy and research at Pensions UK, said the research was designed to support the work of the Pensions Commission and help the commissioners “consider how to manage that risk, particularly through building greater flexibilities into the system”.
While the Pensions Commission has been tasked with exploring ways to address pension adequacy issues, the government has expressly ruled out raising minimum contributions in this parliament.
On introducing flexibilities into contributions, Blakstad said some models “have the potential to improve both short-term affordability and long-term adequacy” – but savers and employers had “limited appetite” for such approaches.
Smaller employers interviewed by the researchers highlighted concerns that a more complex auto-enrolment system could lead to a higher administration burden and increase the risk of “unintended non-compliance”.
“There is no perfect answer to this policy dilemma,” Blakstad explained. “This research is intended to help ensure that decisions about future system design are made eyes-open to the risks and trade-offs.”
The research explored a range of reform options, including raising contribution rates, removing the lower earnings limit for auto-enrolment eligibility, and allowing savers to ‘opt down’ to lower contributions. It also looked at allowing some staff to opt out of contributing while continuing to receive an employer contribution, and the potential for different tiers of contributions.
The report did not identify a reform option that could clearly address the three key considerations of the Pensions Commission, adequacy, affordability and fairness – which Pensions UK said highlighted that amending auto-enrolment rules would require trade-offs.
However, a simple approach of gradually increasing contributions to 12% of salary – split evenly between employees and employers – “improves retirement outcomes significantly for most low- and middle-income households”, Pensions UK said.
What the providers said
“This report highlights the difficulty in building a pension system based on defaults that is genuinely inclusive and shows that expanding auto-enrolment will create risks for some people… It shows that people dislike the things that protect some lower earners from being defaulted into pension saving at a level that they cannot afford and do not need. The commissioners may face a choice between what people support, and think is fair, and what may be in the best financial interests of lower earners.”
“Millions of people are saving into a workplace pension because auto-enrolment works – but contribution levels are still unlikely to deliver the retirement many expect. The challenge is strengthening the system in a way that works for both employers and employees… The government can support by providing a clear, phased roadmap so savers and employers know what is coming and reforms can be introduced fairly and effectively.”
“Improving retirement adequacy is complex and will require a mix of approaches, including moving beyond a ‘set and forget’ mindset by giving people better visibility of their pension savings, more relevant prompts, and the right support to make informed decisions about their future. This will include using insight and data to better understand what works, and to support solutions that feel realistic, sustainable and give people greater confidence.”
“This is a timely contribution to the wider conversation about pension adequacy, particularly as the Pensions Commission considers how the system can support better retirement outcomes while remaining affordable. There are clearly no simple answers, but evidence like this will be important in helping the industry and policymakers understand the choices ahead and keep savers’ needs at the heart of future reform.”
