Millions could benefit if new workplace pension rules were brought in, says IFS

The Institute for Fiscal Studies (IFS) has suggested that there is a "strong case" for most employees to receive money from their employer into a workplace pension, even if they do not contribute themselves.

This would particularly benefit women, part-time workers, young adults and lower earners. The IFS proposed that employees should receive an employer pension contribution of at least 3% of total pay, regardless 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 low earnings. While acknowledging the risk of more employees opting out of contributing themselves, the IFS suggested a trial approach before implementation.

The institute also recommended widening the age range targeted by automatic enrolment from 22 to state pension age to 16 to 74, to help more people in paid work save for later life. It further suggested that increased default employee contributions should be targeted at people on average incomes and above to supplement their state pensions.

For instance, 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. Researchers have warned that less than half of private sector employees who save into a workplace pension are contributing more than 8% of their earnings.

The findings come from the Pensions Review, spearheaded by the IFS in collaboration with the abrdn Financial Fairness Trust. According to the IFS, between 30% to 40% of private sector workers (equating to five to seven million individuals) enrolled in defined contribution (DC) pension schemes may not meet standard income benchmarks upon retirement.

However, when considering partners' pensions and possible future inheritances, the outlook improves. Despite recommendations for higher default pension contributions, the IFS insists employees should retain the option to "opt down" to current minimum contribution rates.

Laurence O'Brien, a research economist at IFS and co-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 leading IFS economist, shared his insights: "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 from 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 £4bn per year. This would particularly benefit women, those working part-time, young adults and the low paid."

Tim Gosling of People's Partnership 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."

And a representative from the Department for Work and Pensions (DWP) 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."

They added: "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."