Around 15 million people are under saving for retirement, even with auto-enrolment, a new report from the Pensions Commission has warned.
The Pensions Commission was revived by the government last year to identify the challenges to retirement saving and make recommendations on how to boost contributions.
Back in 2006, the first Pensions Commission led to the roll-out of auto-enrolment into pension saving.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
But 20 years later, there are warnings that too many people are sticking to the minimum level of contributions, which may not be enough for a comfortable retirement.
Latest Videos FromMoneyWeek
The latest Pensions Commission report looked at the necessary income replacement rates for those who have retired, suggesting around two-thirds of pre-retirement earnings is required.
Using these metrics, around four in 10 (43%) of the working-age population (15 million people) are under-saving, according to the report.
This figure could even reach as high as 19 million without action, the report warns.
Those born between 1965 to 1980 - are projected to have the worst outcomes, with 46% falling below these targets.
Low and middle earners, the self‑employed and women are most at risk, the report warns, as the pensions system fails to evolve to meet modern working lives.
Pensions minister Torsten Bell said: “Britain has got back into the pension saving habit, but the job is only half done with tomorrow’s pensioners still on track to be poorer than today’s.
“The Pensions Commission sets out clearly the scale of the challenge: not enough people are saving for retirement, and many of those that are aren’t saving enough.
"The Commission warns that without action millions more people could be at risk of becoming reliant on state support in retirement.”
Here are the main problems with pension savings that the report identified.
People not saving enough into a pension - even with auto-enrolment
Automatic enrolment has been a major policy success, the report claims, particularity as it means most people in work will be saving for their retirement.
But the Pensions Commission highlights that a third of eligible private sector employees have contributions that only follow the minimum automatic enrolment contributions.
This means that currently 8% of earnings - 5% from the employee and 3% from the employer - between a lower threshold of £6,240 and a ceiling of £50,270 – and this rises to half of the lowest-paid eligible employees.
The median earner is contributing 1.7% of pay above automatic enrolment minimums, according to the report, and where there is additional saving, the evidence suggests that this is led by employer behaviour rather than individual initiative and is more likely to benefit higher earners.
The Commission said it will consider how the eligibility criteria, income thresholds, and minimum contribution rates for automatic enrolment will need to be adjusted in the future.
It isn’t just contribution rates that are an issue though.
The report highlights that the variance in investment returns is wider in the UK than in comparable countries and can greatly affect outcomes. It suggests that the Pension Schemes Act could help address this by boosting how money is invested.
People not saving into a pension
Almost half of working‑age people are not saving into a pension in a typical month, and almost half of those not saving are in paid work.
The report highlights that while opt-out rates for auto-enrolment are low, there are some groups who are excluded.
It highlights that 14% of employees – 4 million people – are not eligible due to automatic enrolment’s age limits and £10,000 earnings trigger.
Additionally, approximately 4 million self-employed workers in the UK don’t have access to auto-enrolment.
Only 17% of the self-employed currently save into a pension, which falls to just 4% for those who earn only from self-employment, the report warns.
The problem with pension freedoms
Savers can start making pension withdrawals from age 55 - rising to 57 from 2028.
The Pensions Commission warns this creates risks, particularly with pension freedom rules providing extra flexibility on how the money is taken.
On current trends around three in 10 private pension pots are accessed at the earliest possible opportunity with half of all pots taken out in full. Nearly half of these are spent on large expenses like a car, holiday or renovations.
The Pensions Commission said: “Managing pension pot access so it lasts over thirty years from age 57 to 87, for example, is no easy feat. Since these changes, we have seen high levels of full cash withdrawals, widespread early access of ‘tax-free lump sums’, and high withdrawal rates that risk running down savers’ pension wealth too quickly.”
The Pensions Commissions is due to make recommendations next year.
But its latest report does provide some indication of its thinking.
It suggests that for pensioners in 2050 and beyond to have adequate incomes in retirement, they will require higher rates of private pension saving and higher coverage too.
That could mean changes to automatic enrolment eligibility, earnings thresholds and the statutory minimum contributions.
The report said: “Low and middle earners are not saving sufficiently and the system does not work for the self‑employed.”
The report also suggestions there should be more protections for people accessing their pension pot.
Jon Greer, head of retirement policy at Quilter said closing the pension gap cannot rely on a single lever.
He suggests financial education has a role to play but structural change is needed, particularly for the self-employed.
He said: “More flexible savings solutions, alongside mechanisms that replicate the success of automatic enrolment in this group, will be essential if participation and adequacy are to improve together.”
But all of this is playing out against an increasingly uncertain policy backdrop, with changes to inheritance tax on pensions, salary sacrifice and the possibility of state pension reform.
Greer added: “When the rules of the system appear to be in flux, it becomes harder to make the long-term decisions that pension saving requires. Stability and clarity are critical if people are to commit more of their income over decades.”
