Future auto-enrolment reforms should focus on flexible pension saving in order to reflect the different challenges that low, middle and higher earners face, a report from the Resolution Foundation has suggested.

The report, funded by People’s Partnership, acknowledged that the one-size-fits-all approach has worked well for the first chapter of auto-enrolment, having improved private pension coverage and boosted people’s pension pots.

Indeed, the report found that the combination of the new state pension and auto-enrolment means that workers can expect to reach the minimum policy target as outlined by the Pension Commission 20 years ago.

While middle and high earners were some way off track on the commission's targets, the report pointed out that this does not necessarily mean that all middle and higher earning workers will face an income shortfall in retirement, as many of these workers are able to use other financial assets to supplement their savings.

For instance, a typical middle earner in their late 50s currently has enough disposable wealth, alongside their pension savings, to secure an adequate income in retirement.

In contrast, whilst the report found that fully auto-enrolled low-earners are on track to hit their target replacement rates (80 per cent of pre-retirement earnings) upon retirement, they face other savings challenges during the working lives.

Given this, the report argued that the next chapter for auto enrolment will require both a boost to saving rates and a more flexible approach, in order to reflect the different challenges that low, middle and higher earners face.

In particular, the report suggested that while the default contribution rates into auto-enrolment should continue to rise over the next decade, initially from 8 to 10 per cent, the additional funds from this next phase of rising contribution rates should go into an easy-access sidecar savings account, with any balance over £1,000 then flowing into an employee’s pension.

According to the report, this saving boost, combined with added flexibility, would help low earners balance building up their rainy-day savings while maintaining their current rate of pension saving, and also help higher earners, who are more likely to already have emergency savings, to further boost their pension pots.

It also said that, if the government still wants to get middle and higher earners closer to their target replacement rates upon retirement wants to raise contribution rates ever further, it should consider doing so for higher earners only, or during middle and late working age.

Commenting on the report, Resolution Foundation economist, Molly Broome, said: “Twenty years ago, and amid widespread concerns about poverty in later life, the Pensions Commission set benchmarks for how much people would need to save during their working lives to enjoy a decent income in retirement.

“Policies like the new state pension, triple lock and auto-enrolment have delivered on their objective of giving everyone a decent minimum level of retirement income.

“But the job is incomplete. And so the new government’s pensions review, which could set policy for the next decade, should focus on tackling the different savings challenges that low, middle and higher earners face.

“As well as continuing to boost pension saving, auto-enrolment also needs to be more flexible.

"It should allow low earners to build up rainy day savings that they can draw on before retirement, while higher contributions for higher earners could help them get closer to maintaining their level of living standards into retirement.”

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