ABI calls for 12% AE minimum contributions by 2031

ABI calls for 12% AE minimum contributions by 2031
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The Association of British Insurers has called out the government to increase minimum auto-enrolment contributions to 12 per cent by 2031.

In a report published on June 21, the ABI looked at the past decade of auto-enrolment and its successes, while proposing a roadmap to drive up pension engagement and savings.

While there are 10.9mn individuals enrolled into a scheme, those who earn less than £10,000 or are self employed are still missing out on pension savings. 

ABI’s director general Hannah Gurga said: “Automatic enrolment has transformed workplace pension savings in this country. But the challenge remains to ensure people are saving enough for their retirement.”

Future recommendations 

To address the undersavings gap, which according to the 2006 pensions commission affects between 9.6mn and 12mn individuals, the ABI has recommended gradually increasing the minimum contribution rates from 8 per cent to 12 per cent in the next decade. 

The report suggested these implementations should be made after 2025 and sets up a timeline for changes to be made.

Current auto-enrolment rules compel employers to enrol into a pension scheme any staff aged between 22 up to the state pension age, who earn more than £10,000 a year. 

There is also a £6,240 lower earnings limit, which is the threshold that allows employees to qualify for certain state benefits, including the basic state pension.

The industry body suggested that policy makers start by decreasing the lower qualifying earnings threshold in a phased approach, between 2023 and 2025.

In 2025/26, a pensions bill should be introduced to guarantee that pensions are officially saved from the first pound earned, as the lower qualifying earnings threshold is reduced to zero, and 18-year-olds are automatically enrolled into pension saving.

A second bill should be introduced in 2028, which would increase minimum contributions to 10 per cent, starting with a rise in employer contributions at 5 per cent.

Finally, in 2031, a third piece of legislation would be introduced to raise minimum contributions to 12 per cent, with the employer and saver paying 6 per cent each.

However, the recommendation of increasing the minimum contribution rates does not stand alone. 

The ABI also felt that “savers should have flexibility” in line with the current economic climate, and that legislation should act in part, by including an ‘opt-down’ option to 10 per cent. 

Pensions Expert reported in April that pension specialists called for such measure to be introduced in the next auto-enrolment reform, as a way of protecting those on lower earnings.

ABI’s director of policy, long term savings and protections Yvonne Braun said: “The huge success of automatic enrolment reflects a long-term plan based on consensus between political parties, industry and employers.

"We need the same approach now to determine the future of the policy, ensuring more people are included and are saving enough, with the right level of flexibility."

Gurga added: “For the next 10 years, we need a detailed plan for getting to higher contributions. We stand ready to work with the government to ensure the next decade of automatic enrolment builds on the proud record of its first ten years.”