PENSIONS
from savers who might panic and pull out of pension saving in the wake of US tariff policies that have caused their pension pots to diminish. Although triennial re-enrolment might help, this could undermine the system’s long-term objectives and result in a new wave of retirement insecurity. Lack of flexibility and engagement Many savers lack a clear understanding of their pension schemes and the adequacy of their contributions. AE relies heavily on default settings, which, while effective for participation, can lead to complacency. The AE generation may look at previous generations and assume their contribution rates will produce a comfortable retirement, without realising they’re comparing apples with pears. Savers are often unaware of the need to increase their contributions, or to actively manage their pension funds, for better investment returns. The system also lacks flexibility to accommodate diverse financial situations. For instance, some workers may benefit from temporarily pausing contributions during financial hardship, while others might wish to contribute more than the current minimum but lack the guidance on how to do so. Recommendations for improvement Gradually increasing contribution rates To bridge the gap between current contribution rates and the recommended 12%-15%, the government could consider a phased increase in minimum contribution levels. For instance, employer and employee contributions could each rise by 1% every three years until the total reaches 12%-15%. Such gradual increases would minimise the financial burden on workers and employers, while ensuring more substantial retirement savings over time. Given the increases in employer National Insurance contributions (NICs) from April 2025 for companies, it’s unlikely this option will be addressed in the short term. Expanding coverage for self-employed and low earners Lowering the earnings threshold for AE would expand coverage and allow lower earners to benefit from starting to save early in their careers through the power of compounding returns. As with contribution rates above, the reduction in the rate at which employers’ NICs commence will again make this unlikely in the short term. For self- employed workers, the government could
explore tailored solutions, such as integrating pension contributions into the tax system, or creating flexible, incentivised pension schemes. Reforming the "qualifying earnings" system To make the system fairer, contributions could be calculated based on total earnings rather than qualifying earnings. This change would particularly benefit low-income workers and those with multiple part-time jobs, enabling them to accumulate larger pension pots. The proposed reduction in the starting level for qualifying earnings that's currently being considered by Parliament could assist here. Enhancing engagement and education Improving financial literacy is crucial for the long-term success of AE. The long-awaited introduction of the pensions dashboard will allow employers and pension providers to offer better tools and resources to help employees understand their pensions, track their progress and make informed decisions about increasing contributions or choosing investment funds. Dashboards will eventually help savers understand their potential retirement income and take proactive steps to improve it before it’s too late. Employers and payroll professionals can help employees with signposting and communications which will assist them in understanding what benefits the dashboard will bring. Introducing more flexibility To address the diverse needs of savers, the system should allow for greater flexibility. For example, employees facing financial hardship could be permitted to temporarily reduce or pause contributions without opting out entirely. At the same time, higher earners should be encouraged to contribute above the minimum rates, through targeted incentives such as enhanced tax relief or employer- matching schemes. Addressing the gender pension gap Women are still more likely than men to have smaller pension pots due to career breaks, part-time work or lower earnings. Introducing policies such as pension credits for carers or encouraging employers to offer greater pension contributions during maternity leave, could help reduce the gender pension gap.
Offering more assistance in the decumulation phase
While building a suitable pensions pot is essential, withdrawing funds in an appropriate manner, while retaining some investment growth is equally important. A recent report from the Institute of Fiscal Studies says that average earners can expect a pot size of around £320,000 in the long term and drawing on this will be complicated for those that have multiple pots, even if these are more visible through the dashboard. The report can be located in full here: https:// ow.ly/f37b50VxaOM. Providers currently communicate with members as if theirs is the only pot available, but withdrawal decisions need to be looked at holistically, based on personal financial and health circumstances. Employers and payroll professionals encouraging a growing number of individuals to access suitable financial advice at the right time will become increasingly essential. Conclusion AE has been a resounding success in increasing pension participation across the UK, bringing millions of workers into the retirement savings fold and fostering a culture of financial preparedness. However, significant challenges remain in ensuring these savings translate into adequate retirement incomes. By addressing issues such as low contribution rates, limited coverage, a lack of engagement and appropriate decumulation, policymakers can build on the successes of AE and create a more robust, inclusive system. The changes proposed above, including higher contributions, expanded eligibility and better engagement tools, will not only improve individual retirement outcomes, but also strengthen the financial resilience of future generations.
PROFESSI NAL in Payroll, Pensions and Reward
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June 2025 | Issue 111
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