With the Pensions Commission expected to produce its first interim report next month, new research has explored contribution rates and optimal ways to support savers who are facing shortfalls in retirement.
This week, Royal London and Oxford Economics launched the latest iteration of their study into the economic impact of raising automatic enrolment minimum contributions – and the pension provider has called for urgent action as a result.
Raising total contributions uniformly to 12% or 14% of salary will have multiple positive impacts over the long term, such as increasing pension incomes, reducing people’s dependence on the welfare system, and potentially raising the level of assets available to invest in the UK economy. By 2060, Oxford Economics estimated that higher contributions could lead to a boost to economic growth of up to £6bn a year.
“Despite the progress made through automatic enrolment, many households are expected to reach retirement without sufficient pension savings in place.”
Alex Stewart, Oxford Economics
However, higher contributions can also adversely affect short-term financial resilience, raise costs for employers, and lower the tax take for the government, the research showed.
One of the study’s five scenarios proposed varying contribution rates by salary bands, in order to reduce the negative impact on low earners from higher payments into pension pots.
Jamie Jenkins, director of policy at Royal London, said: “This is clearly a very challenging period for both businesses and households alike, and now is not the right time to start this journey, but we should make a plan to increase pension saving when that time arrives, and hopefully head off the more significant challenges of having an increasingly large and under-saved population of people in retirement.
“We hope this analysis provides an important contribution to the work of the Pensions Commission, enriching the evidence base for its recommendations.”
Alex Stewart, associate director of economic impact at Oxford Economics, added: “Despite the progress made through automatic enrolment, many households are expected to reach retirement without sufficient pension savings in place. Our research shows that reforms to minimum default contribution rates can materially improve pension adequacy.”
The ’midlife’ savers at risk of retirement poverty
A new study from Legal & General (L&G), meanwhile, has illustrated how those in “midlife” – aged between 40 and 54 – are facing an uncertain financial future.
The research was conducted by Public First and was based on responses from more than 8,000 people. Extrapolating from this sample, L&G said around nine million people in the UK aged 25 to 54 were not currently on track for an adequate retirement, taking account of basic needs, current income, and housing costs.
More than half of this group are estimated to be aged between 40 and 54 and likely to fall between generations covered by defined benefit pensions and those fully supported by automatic enrolment, emphasising the importance of increasing contributions.
The report also found growing pessimism, with 21% of midlife respondents expecting an inadequate standard of living in retirement.
According to the L&G research, the average pension pot for a 47-year-old was just £27,000, dropping sharply for renters and part-time workers. Cost of living pressures, caring responsibilities and insecure employment were cited as key barriers to people saving more for retirement.
‘Not too late’ to improve outcomes
Despite these issues, Andrew Harrop, director at Public First, said there were “real opportunities to improve outcomes”, with the report contending that even modest increases in contributions can help improve outcomes.
“Employers, policymakers and civil society all have an opportunity to address the current shortfall,” Harrop added. “There may still be a long way to go to secure retirement security for all, but the challenge is far from insurmountable.”
“Just as pension savings compound over time, so too can inequality and missed opportunities.”
António Simões, Legal & General
The research also calls for coordinated action from policymakers, employers and civil society to address structural challenges and support better long-term financial security across all age groups.
António Simões, group chief executive officer at L&G, said: “A comfortable retirement doesn’t happen by accident. It’s built over a lifetime of saving. Just as pension savings compound over time, so too can inequality and missed opportunities.
“Our new research highlights the scale of the challenge, particularly for today’s midlifers. Millions are not on track for the retirement income they will need – but, as importantly, our analysis shows it’s not too late to make a meaningful difference for those people.”
The findings form part of L&G’s new long-term initiative, Decades Ahead, which aims to improve financial wellbeing across the UK. It introduces a new measure of retirement adequacy, known as “minimum, replacement, rent”, designed to assess whether retirement income can meet basic living standards, replace pre-retirement earnings, and cover housing costs.
