There is a “strong case” for most employees to receive money from their employer into a workplace pension even if they do not pay into it themselves, according to a report from the Institute for Fiscal Studies (IFS).
Currently, employers have to enroll staff that are between 22 and 66 and earn at least £10,000 per year before tax into a pension scheme.
Employers have to contribute 3 per cent of earnings into this scheme, and their employees must pay in 5 per cent, but if employees choose to opt-out, their employer does not have to pay anything in.
As part of a series of reforms aimed to improve retirement incomes, a report from the IFS and the abrdn Financial Fairness Trust says there is a case for employers to contribute at least 3 per cent of total pay regardless of whether their staff opt-out of paying in themselves.
It said this would benefit the 22 per cent of private-sector employees who either opt out of their pension scheme or are not automatically enrolled due to their earnings being too low.
The IFS said that while there is a risk this leads to more employees opting out of contributing themselves, there could be a trial approach prior to implementation.
The age range targeted by automatic enrolment should also be widened from 22 to state pension age to 16 to 74, to help even more people in paid work save for later life, it said.
Other reforms suggested as part of the research include increasing default employee contributions for people on average incomes and above.
The IFS said there could be a 12 per cent default total contribution rate for the portion of earnings above £35,000, with the additional contributions coming from employee contributions.
This would mean employees contributing 9 per cent of their earnings, rather than 5 per cent.
It said overall, implementing its suggestions would boost retirement incomes by between 12 per cent and 16 per cent (£1,400 to £2,100 per year) for those currently on track for low and middle incomes in retirement.
Laurence O’Brien, a 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.”
A Department for Work and Pensions (DWP) spokesperson said: “We will ensure the pensioners of tomorrow have the dignity and security they deserve in retirement as we carry out our landmark pensions review to boost investment, increase pension pots and tackle waste in the pension system.
“More than 15 million savers could benefit from our new Pension Schemes Bill – with the potential for an average earner to have £11,000 more in their defined contribution pot by retirement.”