Millions of savers are at risk of retiring on incomes that are lower than the national living wage of £14,942 per year, according to analysis from Aviva.
Aviva stated the reason was that many people were only saving as much as the current minimum savings rate under auto-enrolment, which is 8 per cent, as it called for this to be raised to 12 per cent.
The insurer stated government data had shown that average pension contributions in private sector defined contribution schemes have fallen towards the legal minimum levels since auto-enrolment was introduced in 2012.
Due to this trend, Aviva has calculated that millions of workers may fail to achieve the target of 67 per cent of working income in retirement and will actually retire on an income below £14,942 per year.
Alistair McQueen, head of savings and retirement at Aviva, said: "Millions of workers have risen to the challenge of automatic enrolment, despite the fact that average real wages have fallen over the past decade. For this, Britain’s workers deserve huge credit.
"We now need to look again at the automatic enrolment system. It brilliantly achieved its goal of getting people to save, but at 8 per cent minimum may be inadequate to give people a comfortable retirement."
Actual weighted-average contributions (%)
Auto-enrolment minimum contributions (%)
To be released on 20 June 2019
A 2004 report from the then Pensions Commission, a non-departmental public body set up in 2002, set as its benchmark a target income replacement rate in retirement of between 80 per cent of pre-retirement gross earnings for the lowest earners and 50 per cent of pre-retirement gross earnings for the highest earners.
A benchmark of 67 per cent was set for those on median incomes.
Aviva gave the example of a 22-year old contributing 12 per cent of their income over a 46 year working life, which would result in a total of £151,000 into their pension (£3,294 per annum).
Assuming the employer pays half of the contributions, the employee contributes £75,500 over their working life, including tax relief.
According to Aviva, a median investment growth (based on investment return of 2.4 per cent each year) is projected to deliver a private pension fund at retirement worth £342,000.
The pension provider pointed out that even when contributing a minimum of 12 per cent of income, individuals were still at risk of falling short of their target income in retirement.
Age of auto-enrolment
Total pension contributions over working life, to state pension age (based on 12%)
Total employee contribution over working life, including tax relief (based on employee contributing half of the 12%)
Projected value of pension fund at state pension age (based on investment return of 2.4% pa after inflation, and an assumed pension product charge of 0.75% pa)
£151,000 (46 years)
£125,000 (38 years)
£92,000 (28 years)
£56,000 (17 years)
but Kay Ingram, head of public policy at LEBC, has warned that making higher contributions compulsory could cause lower earners to opt out.
She said: "Aviva are right to point out that over the long term 8 per cent total contribution is unlikely to be enough to provide the income desired by most retirees.
"However an increase to 12 per cent is a steep rise and if made compulsory could see opt outs increase. This is especially likely to be the case where younger people are also saving for a home deposit, parents have childcare costs and older workers are supporting children at university.
"Employers are already facing many challenges while the uncertainty of Brexit dominates forward planning, so now does not feel like the right time to consider an increase in employer’s costs."