Increasing pension contributions in the UK will cause lower income households to struggle, according to research from Royal London.
The research, carried out by Oxford Economics, found that introducing a universal pension contribution for all individuals may not be the solution for everyone when it comes to getting more people to invest in their pensions.
Only 40 per cent of households with a DC pension are expected to have the necessary savings for a ‘moderate’ standard of living by 2040.
Therefore, the research evaluated the potential benefits of implementing reforms that could increase the mandated minimum contribution in private sector DC schemes.
It modelled three scenarios to highlight the range of potential impacts of reforms for those in a DC scheme, which included:
- Scenario 1: employers raise contributions to 5 per cent, resulting in the total minimum contribution level increasing to 10 per cent.
- Scenario 2: employers and employees increase contributions to 6 per cent, leading to total minimum contributions of 12 per cent.
- Scenario 3: employers and employees raise contributions to 7 per cent, leading to total minimum contributions of 14 per cent.
Speaking at the launch of the report, Jamie Jenkins, director of policy and communications at Royal London, said: “We have plenty of debates going on in the world of pensions and they have been significantly elevated over the past 12 months as it became arguably part of the economic solution.
"The government has seen that there’s actually an awful lot of money in pensions and we need an awful lot of money invested into the economy. So perhaps we could marry the two.”
Jenkins discussed that while the introduction of auto-enrolment was a success there is still an “unanswered question” around the adequacy of the amounts that have been put in through workplace pensions and what they will provide people in retirement.
“This is really about starting the debate not concluding it. This report isn’t about having all the policy answers but starting to provide a baseline to open the debate about how to get contributions to a more adequate level,” he added.
The report found that higher contributions would result in a larger pool of assets available to invest in UK private businesses and higher pensioner income in retirement.
It also revealed that at a household level, higher contributions led to a ‘significant’ improvement in the adequacy of pension savings and helped to close the under-saving gap.
Impact on poorer households
While the report illustrated that higher contributions could offer long-term advantages this would cause households to face higher contributions costs in the present which could cause lower income households to struggle.
Nearly one in 10 households in the lowest quintile are expected to have less than £100 in easy-to-access savings if the higher contribution policy were to be introduced in 2025.
The research found poorer households would need to adjust their consumption to pay for higher contributions which may be “challenging”.
It suggested a lower increase from employers such as scenario 1 may be more appropriate for poorer households.
Jenkins said it was important for lower income households to assess their financial situation and whether increasing contributions was the right thing to do, because trying to achieve the same savings goals as those from more wealthier households may not be financially viable.
