Phased increases to automatic enrolment (AE) contributions could leave a young worker with £85,000 more in pension savings by age 68, although changes to contribution rates alone would come too late for many people nearing retirement, research from Standard Life has shown.

Analysis by Standard Life found that gradually increasing default pension contributions for a worker aged 22 from 8 per cent to 12 per cent could increase the value of their pension fund at age 68 from £216,000 under the current system to £301,000.

Akin to the Australian system, this would be enough income to meet Pensions UK’s moderate Retirement Living Standard.

However, the research also found that contribution reform alone would have a more limited impact on older workers, with phased increases to AE contributions adding £21,000 to the pension pot of a 50 year old at age 68, and only £2,000 for a 60 year old at retirement.

Standard Life said Australia's experience showed contributions can be increased gradually over time, while its research found 69 per cent of UK adults would be willing to increase pension contributions alongside their employer in return for a higher retirement income.

The research also suggested that contribution increases should begin by 2030, warning that a five-year delay could leave younger workers with up to £12,000 less in retirement savings.

The analysis comes following the Pensions Commission’s interim report that estimated around 15m people are currently under-saving for retirement.

Furthermore, Pensions Commissioner, Baroness Jeannie Drake, argued at Pensions UK’s Annual Conference yesterday that increasing minimum AE contributions is the "best route" to boosting pension savings and tackling the UK's retirement adequacy crisis.

Standard Life managing director for workplace and retail intermediary, Emma Furlonger, said: "The opportunity to make progress on pension adequacy is within our grasp, and our analysis shows that small, gradual increases in pension saving have the potential to significantly improve retirement outcomes for future generations.”

She explained that the experience of other countries demonstrated that phased contribution increases can provide the benefits of higher long-term saving, while giving employees and employers time to adapt.

"With the Pension Commission's recommendations expected next year, there is an opportunity to set out a comprehensive package of reforms to improve retirement adequacy, combining gradual increases in contributions with measures such as removing the lower earnings limit and bringing younger workers into pension saving earlier,” she said.

The research showed that workers in their 50s and 60s cannot rely solely on higher default contributions to close any gaps in their DC pension savings.

The Standard Life Centre for the Future of Retirement director, Catherine Foot, commented: “Many Gen X are approaching retirement having missed out on a full working lifetime of automatic enrolment, while also seeing the shift away from defined benefit pension schemes that previous generations were more likely to rely on. As a result, many are reaching later life with less pension wealth than they need and less time to close the gap.”

Foot said those who can afford to may need to consider voluntarily increasing their pension contributions, while wider support is needed to help people remain in the workforce, build skills and continue to earn and save where they are able to do so.

“This includes supporting people who are balancing caring responsibilities or living with ill health to access flexible employment opportunities, strengthening their retirement security and financial resilience," she added.

“Improving retirement outcomes requires a long-term strategy for future generations, but there is an equally pressing need to address the challenges facing those approaching retirement today.”

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