The great 8% question

Automatic enrolment is a great first step down the road to securing a better retirement for British workers. But policymakers of all political colours agree that the contribution rate of 8 per cent of band earnings is a milestone, not the final destination.

The pensions minister Steve Webb said as much back in April, commenting that “at some point a future government will have to deal with the great ‘8 per cent is not enough’ question.”

Adequacy of employer and employee contributions is an issue the independent Pensions Policy Institute (PPI) has been looking at for some time. Because the returns received from defined contribution pensions are hard to predict accurately, the PPI makes its projections on the basis of probable outcomes. It calculates a typical middle-earner who starts saving at age 22 needs to make a contribution of 13 per cent of earnings if they are to have a 75 per cent chance of achieving their target income in retirement.

That is 5 per cent more than the current requirement of 8 per cent being contributed once auto enrolment is fully implemented. What’s more, that 13 per cent contribution figure is calculated on the basis that the government remains committed to the ‘triple lock’, its pledge to increase state pension by the highest of price inflation, wage inflation or 2.5 per cent.

If a future government decides to increase the single-tier pension in line with average earnings, the amount a middle-earner needs to achieve an adequate income retirement shoots up to 17 per cent says the PPI.

What’s more, these figures for achieving adequate retirement incomes are for those who start saving at age 22. For many older workers who are yet to start saving, the amounts needed will be even higher.

Nobody is expecting employers to solve the retirement challenges of their workforce overnight. But the good news is we are finding some companies are choosing to contribute more than the legal minimum into their employees’ pots.

Research commissioned by NOW: Pensions in March found 8 per cent of employers are intending to pay more than the legal minimum, with 9 per cent considering increasing contributions above the minimum at some time in the future.

There are sound reasons for employers contributing more. A majority of those planning to pay more in – 56 per cent – believe doing so will help with recruitment and retention of staff by making them an employer of choice, while 39 per cent think paying in more will encourage staff to pay in more.

The government is committed to reviewing its auto enrolment policy in 2017 and requiring employers to increase contributions is likely to make its way to the top of the political agenda as soon as the 2015 election is out of the way.

In fact, of the firms we spoke to, 43 per cent expect an increase in contribution levels at some stage in the future. So, if it happens, it won’t come as a huge surprise.

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Martin Woods, SALT.agency