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 the Institute for Fiscal Studies (IFS).
This would particularly benefit women, part-time workers, young adults and lower earners, it was suggested.
The institute proposed that employees should receive an employer pension contribution of at least 3% of total pay, irrespective of whether they also contribute.
This could benefit the 22% 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% default total contribution rate for the portion of earnings above £35,000 (around median full-time earnings), with the additional contributions coming from employee contributions, the IFS said.
Less than half of private sector employees who save into a workplace pension contribute more than 8% of their earnings, researchers said.
The research was carried out as part of the Pensions Review, led by the IFS in partnership with the abrdn Financial Fairness Trust.
The IFS found that around 30% to 40% of private sector employees (five to seven million people) saving in defined contribution (DC) pension schemes are on course to have individual incomes that fall short of standard benchmarks in retirement, though prospects look better when partners’ pensions and potential future inheritances are factored in.
Employees who face higher default pension contributions under the suggestions should still be given the choice to “opt down” to the minimum pension contribution rates currently in operation, the IFS said.
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% from the employer regardless of whether an employee makes a contribution could boost employer pension contributions by £4 billion per year. This would particularly benefit women, those working part-time, young adults and the low paid.”
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 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.”
