Government urged to force matching of voluntary contributions

Currently, employees over 22 are automatically enrolled into making contributions worth 5 per cent of their salary, which employers must match with a 3 per cent contribution. Employees can opt-out or increase contributions, but employers do not have to match further contributions.

Hargreaves, which opposes increasing the 8 per cent minimum rate, said the proposal would incentivise "further saving" for individuals that want it.

“Our position is that the bedrock that you get from auto-enrolment should see most people in a pretty decent place when they come to retirement,” said senior analyst at Hargreaves Nathan Long. “If there is still need to provide any further incentive then it should be to offer matching on top.”

The government plans to lower the auto-enrolment age to 18 and begin pensions contributions from the first pound earned by the mid-2020s. Hargreaves called the plans "sensible".

The reality is that contributions of 8 per cent of earnings will not deliver an adequate income for a median earner

Gregg McClymont, The People's Pension

Mr Long said the proposal would give individuals greater choice on how their savings are spent.

“They might want to put further savings towards [their] pension – but particularly if they're young, or if they have pressure because of a young family, they're not automatically pushed into saving more for a point in time that can be many years away,” Mr Long continued.

Industry scepticism

The calls have been met with scepticism. The Pensions and Lifetime Savings Association said Hargreaves’ proposal would not provide an adequate retirement for everyone.

Nigel Peaple, director of policy and research at the PLSA, said: “Auto-enrolment has been a huge success in getting millions more saving for retirement, but this [proposal] still isn’t going to be enough to give everyone the lifestyle they want.”

PLSA research in 2018 found that, for the increasing proportion of pension savers who have only defined contribution pensions, only 3 per cent were on track to meet the Pension Commission’s target replacement rate of £19,162 for a median earner.

“Average workplace pension contributions are too low and we believe they must increase to 12 per cent of someone’s salary if savers are to be comfortable in retirement,” Mr Peaple said.

“In order to make this affordable for everyone, and not just the higher earners, this should be done gradually between 2025 and 2030, and contributions should be split 50:50 between employers and savers,” he added. “With minimum contributions already going up to 8 per cent from April 2019, this would mean employees paying just 1 per cent more and employers paying 3 per cent more.”

Gregg McClymont, director of policy at B&CE, provider of The People’s Pension, said: “The employer match is a powerful economic incentive, with global evidence confirming the power of matching as a device to raise savings rates.”

“While [government plans] removing the lower earnings band and lowering the qualifying earnings threshold will improve pensions adequacy for many automatically enrolled savers, the reality is that contributions of 8 per cent of earnings will not deliver an adequate income for a median earner,” Mr McClymont said.

He agreed that pension providers should be careful about further squeezing disposable incomes given current "stagnating living standards", but said the industry "should be clear about the facts”.

If introducing greater employer matching is likely to drive better outcomes for employees in retirement, it may be seen as an unwanted extra bill by employers.

Helen Morrissey, pension specialist at Royal London, said: “While an employer match on pension contributions acts as a powerful incentive to increase saving, we must beware of placing further financial burdens on employers by compelling them to go down this route.”

She called for clarity from the government on its future plans for auto-enrolment, and pointed to the fact that tinkering with employer and employee contributions "does little to help groups such as the self-employed, who are badly underserved by the current system”.

The Department for Work and Pensions declined to comment on Hargreaves’ proposal, but a spokesperson said: “Automatic enrolment has been a truly revolutionary reform and extraordinary success, bringing more than 10m workers into workplace pension saving since 2012.

“The recent increase to the minimum contribution rate will help people save more, and employers are hugely supportive of our phased approach to ensuring workers are on course to financial security in later life,” the spokesperson added.