Up to seven million workers face a grim retirement because they are not saving enough into pensions.
A report by the respected IFS think-tank has laid bare a potential ticking time-bomb of poverty for the current generation of workers.
It found that between 30 per cent and 40 per cent of private sector employees saving in defined contribution (DC) pension schemes are on course to fall short of standard benchmarks for comfortable incomes.
One in five are not pumping any money into a pot, while less than half stash more than 8 per cent of their earnings.
The review – carried out with the abrdn Financial Fairness Trust – said there is a ‘strong case’ for employers to pay 3 per cent of total pay into a workplace pension even if staff do not.
And it suggested that employees with above-average earnings should have a higher ‘default’ contribution rate of 7 per cent.
A report by the respected IFS think-tank has laid bare a potential ticking time-bomb of poverty for the current generation of workers
That could 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, the IFS said.
It also said increased default employee contributions should be targeted at people on average incomes and above to help some middle and higher earners better supplement their state pension.
For example, there could be a 12 per cent default total contribution rate for the portion of earnings above £35,000 – roughly the median level of full-time earnings.
Laurence O’Brien, a research economist at IFS and an author of the report, said: ‘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.’
David Sturrock, a senior research economist at the IFS and another author of the report, said: ‘There is a strong case for almost all employees to receive an employer pension contribution, irrespective of whether they make a contribution themselves.’
Mubin Haq, chief executive of the abrdn Financial Fairness Trust, said: ‘Guaranteeing 3 per cent from the employer regardless of whether an employee makes a contribution could boost employer pension contributions by £4billion per year. This would particularly benefit women, those working part-time, young adults and the low paid.’
The review – carried out with the abrdn Financial Fairness Trust – said there is a ‘strong case’ for employers to pay 3 per cent of total pay into a workplace pension even if staff do not
Tim Gosling, head of policy at People’s Partnership, provider of the People’s Pension, said: ‘The IFS’s focus on mitigating concerns about the affordability of increased pension saving for lower earners is very welcome. Workplace pension policy has to work at all points in the earnings distribution.’
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 15million 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.’