This report discusses how public policy should change to bring about better outcomes in retirement for employees through their accumulation of private pension wealth. In doing so, we draw on new modelling undertaken as part of the Pensions Review (O’Brien, Sturrock and Cribb, 2024) as well as new evidence from public engagement and focus groups undertaken as part of the Review. We focus entirely on policies that affect private sector employees, leaving to one side potential issues with the design of public service pensions. We examine policies that affect the accumulation of defined contribution pension wealth that could be used to fund retirement income, focusing on the parameters of the automatic enrolment system as these have been shown to be powerful in influencing the retirement saving outcomes of private sector employees (Cribb and Emmerson, 2020). 

 

New modelling published alongside this report (O’Brien, Sturrock and Cribb, 2024) shows the scale of the challenge facing private sector employees in trying to accumulate private pension wealth. The economic and policy environment has changed significantly over the last two decades, with substantial consequences for retirement saving decisions. Specifically: 

 

▪ Big increases in the flat-rate part of the state pension relative to average earnings, and enhanced universality, mean the state pension provides a much stronger foundation level for retirement incomes. This is particularly the case for women, the self-employed, and other groups with lower lifetime incomes, for whom the flat-rate component of the state pension is an especially important source of retirement income. 

 

▪ Automatic enrolment has successfully brought millions more private sector employees – especially those on average and below-average earnings – into workplace pensions. However, even with automatic enrolment, at any point in time around one-quarter of private sector employees are not contributing to a workplace pension. These people are roughly evenly split between not being in the automatic enrolment target group (e.g. because they earn too little) and being in the target group and choosing to opt out. Most of those brought into workplace pensions by automatic enrolment contribute relatively low amounts: fewer than half of private sector employees saving in a defined contribution pension have pension contributions of more than 8% of their total earnings. 

 

▪ Changes in the economic environment have made it more difficult to prepare for retirement: lower earnings growth and asset returns make it harder to accumulate pension wealth, and higher longevity at older ages means that those who are not retiring later will need to draw on their pensions over a longer period. This is particularly the case for those on middle and higher lifetime incomes, who are more reliant on private pensions. 

The report's policy suggestions are: 

 

▪ Any employee who earns enough should be eligible for automatic enrolment from age 16 up to age 74 (before and after which people are not allowed to contribute to a tax-favoured private pension), rather than from 22 to state pension age (as it is now). This is a simplification to the system. While those aged 16 to 21 and from state pension age to 74 can request to be enrolled into their employer’s pension scheme and, if they have sufficient earnings, receive an employer contribution, this change would mean more workers would be automatically enrolled if they earn over £10,000. 

 

▪ There is a strong case for employees to receive an employer pension contribution of at least 3% of total pay, irrespective of whether they contribute themselves. This would prevent many from missing out on an employer pension contribution if they are not eligible or if they opt out, particularly benefiting lower earners. Compared with other ways of increasing employer pension contributions for the lower-paid, this is less likely to push down on lower earners’ wages, as any resulting reduction in wage growth cannot easily be targeted at those who would otherwise have opted out of their workplace pension. A risk is that making the employer contribution non-contingent would lead to many more choosing to opt out of making an employee contribution. Our reading of the available evidence is that the numbers responding in this way would be small. But a government worried about this issue could trial this system amongst a group of employers prior to implementation to provide greater evidence. To prevent some monthly contributions being exceptionally small (and very small pension pots potentially proliferating), some minimum level of earnings would need to be defined, above which employer contributions become required. We suggest an appropriate figure could be around £4,000 per year. 

 

▪ There is a good case for being particularly careful with policies that aim to increase the proportion of their current earnings that lower earners save in a private pension. Higher pension saving would lead to higher incomes in retirement, but this must be balanced against the potential cost of lower take-home pay now, which may be harder for lower earners to bear. This lower take-home pay would be the direct result of higher employee contributions, and could also arise from higher employer contributions if these lead to lower growth in wages. For people currently earning between £10,000 and £15,000, almost two-thirds (63%) are in households with below-average incomes, 22% are in income poverty and 20% are in ‘material deprivation’. They also face other financial pressures: half of them have less than £1,500 in accessible savings. 

 

▪ If the government utilises legislation passed in 2023 (for Great Britain, with the Northern Ireland Assembly currently considering an equivalent bill for its jurisdiction) allowing it to reduce the lower limit for qualifying earnings to zero, default pension contributions (from employees, employers and tax relief) would increase by around £500 a year for everyone currently targeted by automatic enrolment. This would imply a much larger increase in contributions as a proportion of earnings for low earners. A person earning £10,000 on minimum contributions would see employee pension contributions rise by £250 per year, pushing down take-home pay by 2.5%. Any reduction in wages arising from employers passing on the costs of increased employer contributions to their employees would increase this fall in take-home pay further. If the new government is to proceed in this direction, it should therefore give serious consideration to diverting the additional contributions from this policy initially into a liquid savings account, similar to the NEST sidecar account. While this would reduce the extent to which the policy ultimately boosted retirement incomes, it should also reduce adverse consequences for working-age living standards. 

 

▪ Additional pension contributions are easier to bear when incomes are higher. Increases in the default pension contribution above 8% of earnings should therefore be targeted at average – and above-average – earners. Additional pension contributions are also easier to bear when day-to-day expenditures are lower. For many, this happens once children are older, mortgages are less of a burden and student loans are paid off, perhaps after age 50 or 55. There is therefore also a case for increasing default contributions above 8% more broadly among those aged over 50 or 55. In either case, these targeted higher total contributions should not involve higher default employer contributions. Increases for higher earners and older employees would also help many who are low earners at some points in their life – either by encouraging them to save more at a later point when their earnings are higher or through boosting the pension saving of a higher-earning partner. 

 

▪ Around a fifth of employees in DC pensions earning around £50,000 are on minimum pension contributions. But employees earning above the upper limit for qualifying earnings of £50,270 currently face a declining minimum pension contribution (as a percentage of their pay) as they earn more. These people should, in general, be saving higher fractions of their earnings as they earn more, so the current automatic enrolment minimums are less good at guiding them to make good decisions. The upper earnings limit for qualifying earnings should therefore be raised. There is a case for increasing this to £90,000, which would mean that, even with a rise in default minimum contributions to 12% for the portion of earnings above average earnings, default minimum contributions would remain below the ‘money purchase annual allowance’ (the limit for tax-relieved pension saving for those who have made a flexible withdrawal from a private pension). An alternative would be to restore this limit to its real-terms value in 2021–22 (from when it has been frozen in cash terms): this would increase it to just over £60,000 today. Indeed, the freezing of the upper earnings limit for qualifying earnings had the consequence of reducing minimum saving levels for those on £60,000 or above by around £800 a year. This limit could be increased for total contributions. One concern with raising the upper earnings limit could be that this would increase the up-front income tax relief going to high earners, at a cost to the exchequer. Much of the additional relief would be tax deferred rather than tax avoided. And while there would be some overall cost to the public finances, using automatic enrolment parameters to steer employees away from making good retirement saving decisions in order to limit those reliefs would be very poor policymaking relative to tackling overgenerous reliefs directly. 

 

▪ If higher default total pension contribution rates are introduced for all earners, or for specific groups of the population such as average and above-average earners or older workers, employees should be presented with the option to ‘opt down’ to the minimum pension contribution rates currently in operation. 

 

▪ The values of parameters in the current system, such as the ‘earnings trigger’ above which employees are automatically enrolled, have been eroded by inflation and grown much less than earnings. The earnings trigger (£10,000) is also now 13% below the annual value of a full new state pension (£11,502), whereas on its introduction in 2012 it was 45% higher than the then annual value of a full basic state pension (£8,105 and £5,587, respectively). To prevent further erosion, the earnings trigger for automatic enrolment, the upper limit for qualifying earnings, and the lower limit for qualifying earnings (if it is retained) should be increased over the longer run in line with growth in average earnings. 

 

▪ The experience of the past 20 years highlights that the saving landscape can change significantly over a fairly short period. Given how powerful they are in influencing saving decisions, automatic enrolment default rates should be subject to a regular and frequent review – perhaps aligned with the periodic review of the state pension age and certainly not occurring less than once a decade – to ensure that they are set up to best support current savers.