AE contribution rates need to rise to 12%, expert tells MPs

AE contribution rates need to rise to 12%, expert tells MPs
Photographer: Luke MacGregor/Bloomberg

Auto-enrolment contributions need to rise to 12 per cent of earnings from the current 8 per cent, but this change should not be rushed through, MPs have been told.

Speaking to the work and pensions committee this morning (February 23), Nigel Peaple, director of policy and advocacy at the Pension and Lifetime Savings Association, said auto-enrolment pensions “work really well”, while the voluntary saving side simply “hasn't come through”.

“We believe the answer is to increase the automatic enrolment contributions,” said Peaple. “You could go from the current 8 per cent of earnings, to about 12 per cent of all earnings over the next decade.”

Peaple was quick to caveat that “there's no need to rush it”.

“Very importantly, given the cost of living crisis at the moment, it shouldn't be rushed and ideally you might do it in two steps,” he said.

“The first step being you increase the employer contribution from 3 per cent to 5 per cent, which would match the employee contribution.

“Do that by 2030, it would be a levelling up of pension provision. And then you could try and add on an extra per cent or so after that.”

While the UK state pension is “about right” if not a “little on the lean side”, by contrast workplace pension saving “really is too low”, Peaple said.

Peaple said looking back at targets that the now-defunct Pensions Commission came up with, people in defined contribution scheme will struggle to have the right income in retirement.

The non-departmental public body, set up by a Labour government in 2004, said someone on media earnings should aim for two thirds of former income, someone of half average earnings needs about 80 per cent of former income and those with twice average earnings need about as half as much as what they earned previously come retirement.

Peaple said subsequently the PLSA has modelled different scenarios with independent actuaries, known as it Retirement Living Standards. 

It found only half of those it surveyed were likely to reach the target amounts set by the Pensions Commission, and those that were had some defined benefit provision.

“For people who are only in defined contribution saving, only 3 per cent of them are going to hit those Pension Commission targets.”

For years, the PSLA has argued that due to a gradual decline of defined benefit pensions from the mid-1990s, paired with the “failure” of attempts to stimulate voluntary saving, these targets are not fit for purpose.

“What we've seen is the voluntary saving side hasn't come through. And what we've seen is the behavioural economics lessons of AE - they work really well, with 90 per cent of people staying. They like it, but they can opt out if they want,” said Peaple.