Most workersmake low contributions to their pensions, despite auto-enrolment increasing overall pension saving, a report from the Institute for Fiscal Studies has found.
The report, published today (September 16), looked at the adequacy of future retirement savings and found less than half of private sector employees who save into a workplace pension contribute more than 8 per cent of their earnings.
The report showed up to 40 per cent of private sector employees with defined contribution pension schemes are on course to have individual incomes that fall short of standard benchmarks in retirement.
The IFS made a series of recommendations, including employers contributing 3 per cent of total pay to all workers, regardless of whether they contribute to their pension themselves.
It forms part of the government's pension review, the initial stage of which was announced in August.
In response to the report Jamie Jenkins, director of policy at Royal London, said: "The nation is facing up to a ticking time bomb, with increasing numbers of people heading towards retirement with inadequate savings.
"This isn’t simply a societal issue, but an economic challenge. People should be able to retire with dignity, rather than feel they enter later life viewed as a burden on the working population."
He called the government's review of the pensions landscape a "crucial inflection point" to put pension saving on a different trajectory.
The IFS identified low earners as having low levels of retirement income adequacy as well as single people and retired renters.
It also found a quarter of employees are still not saving into a pension, half of whom are targeted by auto-enrolment.
Laurence O’Brien, research economist at IFS and an author of the report, said: "While the state pension now provides a strong foundation income in retirement, most will want or need to supplement that.
"Too many private sector employees appear on course to end up on a low – or disappointing – retirement income.
"While there is often concern about savers not saving enough, an additional problem is that despite automatic enrolment boosting workplace pension membership, more than one in five private sector employees are still not saving in a pension."
Other recommendations from the institute included expanding the age for auto-enrolment from 22 to 16 and raising the upper limit in qualifying earnings.
Matt Calveley, director and DC specialist at Isio said: "We support the idea of raising minimum contributions, but it should be phased in carefully. Employers could increase their share first, eventually matching a 6 per cent contribution from both sides.
"There should also be options for those who want to contribute more, with matching from employers, and the ability to direct savings into liquid accounts for those who need immediate access to funds.
“Expanding the age range for automatic enrolment is another logical step as people are working longer, and raising the upper earnings limit would allow higher earners to save more effectively. However, simplicity should be maintained, and any changes must avoid adding unnecessary complexity to the system."
