The Second Pensions Commission was set up by the government to consider how to address the risk of many working-age people receiving low incomes in retirement. Increasing minimum pension contributions under automatic enrolment is a natural policy lever to consider to help increase future retirement incomes.
A new IFS report, funded by the IFS Retirement Saving Consortium, assesses a range of potential reforms to increase minimum pension contributions for employees participating in a scheme.
The research highlights and quantifies the key trade-offs involved in increasing minimum contributions: while this could significantly improve future retirement incomes, it would also mean lower take-home pay for employees, higher costs for employers and additional costs to the exchequer due to higher pensions tax relief.
The key questions will be how to balance the benefits against the costs, and for whom the benefit of additional income in retirement outweighs the cost of lower income in working life.
Key findings include:
- Changes to minimum contributions would most directly affect workers who currently receive only the statutory minimum employer contribution. Among private sector employees saving into a defined contribution pension, 28% received the statutory minimum employer contribution (3% of ‘qualifying’ pay) in 2024. By contrast, 31% received employer contributions worth at least 6% of total pay. Higher earners were more than twice as likely as the lowest earners to receive contributions worth at least 6% of total pay.
- While increasing minimum contributions helps to increase retirement incomes, this comes at the cost of lower take-home pay today. Policies that increase saving particularly among low earners would have a disproportionate effect on their take-home pay. Take-home pay of low earners would be particularly affected if minimum contributions were calculated from the ‘first pound of earnings’, rather than using the current definition of ‘qualifying earnings’ (those between £6,240 and £50,270 per year).
