On the go: Policymakers should carefully consider later life cycle factors when developing future policies to increase retirement savings, according to the Institute for Fiscal Studies.
In a research paper published on Monday, the IFS stated that although individuals should start saving into a pension at a younger age, there are good reasons why contributions should increase substantially through their working life.
Considering that many employees experience earnings growth over their lifetime, the government should nudge people to increase their pension contributions when their children leave home, mortgages are paid off, or student loans come to an end.
Auto-enrolment into workplace pensions does not currently encourage contribution rates that increase with age, but future adjustments to this or other policies should carefully consider these issues, the IFS said.
Examples of policies that should be considered include default employee contribution rates that rise with age, increases in employee contribution rates that are triggered by earnings increases, and nudges to encourage individuals to increase their pension savings when their children leave home, or when they finish debt repayments such as student loans or mortgages.
The IFS research, which uses an economic model to illustrate how people would be expected to change their savings rates over their lifetime in response to predictable factors, showed that a “typical” graduate with two children should increase their pension contributions from around 5 per cent of pay before the children leave home to between 15 and 25 per cent of pay after that.
That would mean making two-thirds of their pension contributions after the age of 45.
The findings also highlight an important downside of defined benefit pension arrangements, since contribution rates are set by the scheme rules and cannot be varied over working life to suit an individual’s circumstances or the timings of their capacity to save.
Rowena Crawford, an associate director at IFS and one of the authors of the report, said: “There are good reasons why individuals should not want to save a constant share of their earnings for retirement over their entire working life.
“This does not make automatic enrolment, with its single default minimum contribution rate, a bad policy.”
However, as policymakers consider how to increase retirement saving further, “focus should be on policies that increase retirement saving at the best time in people’s lives rather than just increasing saving irrespective of their circumstances”, she added.
