Royal London and Oxford Economics have urged policymakers to set out a plan to increase default pension contributions to more adequate levels as the UK faces a retirement crisis.
In a new report entitled ‘Higher auto-enrolment contributions, pension adequacy and economic outcomes’, the pair model five reform scenarios, exploring a range of potential changes to auto-enrolment rules.
These include existing proposals to reduce the minimum age from 22 to 18 and the removal of the lower earnings limit, as well as making headline increases in default saving rates.
Each scenario is designed to reflect international evidence that gradual increases give employers and employees time to adjust, building towards higher contributions over time.
The analysis includes the improved outlook for people reaching retirement and also considers the short and long-term impact on the economy.
According to the findings, most households are currently falling short of both key adequacy benchmarks: the Retirement Living Standards and Target Replacement Rate. By 2040, only 36% of households that have only defined contribution pensions are expected to meet the TRR threshold and just 26% will likely achieve the moderate RLS benchmark.
The modelling also shows that by 2060, an increased flow of savings into pension schemes would boost UK investment from the pension sector, leading to GDP gains ranging from £0.7 billion to £6.2 billion, depending on the scenario.
Jamie Jenkins, director of policy at Royal London, said: “The analysis makes clear that without higher default contributions, millions of people risk falling short of a decent income in retirement, and it sets out ways in which we might start to address this through increasing contributions over time.
“It also illustrates that, over time, there are benefits to the economy in helping drive growth, something which everyone can benefit from.
“This is clearly a very challenging period for both businesses and households alike, and now is not the right time to start this journey, but we should make a plan to increase pension saving when that time arrives, and hopefully head off the more significant challenges of having an increasingly large and under-saved population of people in retirement.
“We hope this analysis provides an important contribution to the work of the Pensions Commission, enriching the evidence base for its recommendations.”
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