Warning of pension contributions shortfall may be overblown

Pension-scheme membership hit a record high last year, with some 46 million Britons enrolled in at least one workplace scheme, new official figures reveal. But, the typical pension scheme member is only contributing 5% of pay to their pension, plus their employer’s contribution, raising questions about whether they will have enough to retire on.

On the one hand, the growth in pension-scheme membership under the auto-enrolment system introduced in 2012 represents a substantial success. The system requires all employers to offer staff a pension plan and pay into it on behalf of those who have not specifically opted out.

Over time, the minimum contribution levels have been significantly increased. In April 2018, the minimum contribution was set at 5% of salary, with employers ordered to pay at least 2% of this; these minimums were raised to 8% and 3% respectively in April 2019. And while the average total pension contribution made by members of defined-contribution schemes rose to 5% last year from 3.4% in 2017, members of the typical final-salary (defined benefit) pension plan enjoyed a 25.6% total contribution.

Yet the situation may not be as gloomy as these figures suggest. Young people will often have started saving much earlier than previous generations. And as Merryn Somerset-Webb pointed out recently, our pension system is currently in good shape.

According to figures from broker Interactive Investor, if you start work on £20,000 at 30, stay opted in, see your salary rise by 1% in real terms a year and make annual net returns of 5%, you will end with savings of nearly £200,000. “In terms of the absolute levels of assets in its pensions, the UK is one of the best-set countries in the world”.