Auto-enrolmentJun 21 2022

ABI calls for 12% AE minimum contributions by 2031

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
ABI calls for 12% AE minimum contributions by 2031
Credit: CottonBro/Pexels

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.”

Industry supports reforms

Several industry specialists have welcomed the ABI’s proposed reforms, as several calls have been made for the government to increase minimum pension contributions.

Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, noted that “current pension contribution levels are not likely to give people the level of retirement income they expect or need”.

“As the government seeks to ‘level-up’ the economy, narrowing wealth disparities between regions and different demographics, we think now is the right time for it to commit to a timetable for levelling up pensions, gradually, over the next decade”.

Phil Brown, director of policy at B&CE, provider of The People’s Pension, argued that “millions of people are only making the minimum contribution to their pension, which in many cases won’t be enough for people to live on in retirement”. 

He added: “While a conversation about the minimum contribution rate is desperately needed, it should not just be between the pensions industry and government, we must find consensus among employers and trade unions too. 

“The current cost of living crisis climate means that now is not the right time to do it, but we need to be ready to consider the future of automatic enrolment once the economic situation improves.”

calum.kapoor@ft.com