The current 8 per cent minimum automatic enrolment (AE) contribution rate is creating a "false sense of security" among savers, with many assuming that contributing the statutory minimum will provide an adequate retirement income, the Society of Pension Professionals (SPP) has warned.

In its response to the Work and Pensions Committee's inquiry into pensions adequacy, the SPP argued the current minimum is no longer sufficient to tackle the UK's retirement adequacy crisis, calling for contributions to rise to 12 per cent of total earnings over six years.

The organisation highlighted Department for Work and Pensions (DWP) figures suggesting that 15 million people are currently under-saving for retirement, warning that this could be a significant underestimate depending on future State Pension policy.

"The 8 per cent minimum has achieved its job (getting millions to save), but it is now the wrong policy anchor for the next stage of pension reform, which is to ensure millions are not just saving but saving enough," the SPP stated.

It argued that the statutory minimum created a "behavioural anchor", with many savers interpreting the government-set contribution rate as a sign they were saving enough for retirement.

The SPP also noted that the current 8 per cent minimum applies only to qualifying earnings between £6,240 and £50,270, so many workers save far less than 8 per cent of their total earnings.

To address this, the organisation recommended increasing minimum contributions to 12 per cent of total earnings, with a minimum employer contribution of 6 per cent, arguing that this would provide a more balanced approach to addressing retirement inadequacy.

It proposed a six-year phased transition, beginning with an increase in total contributions from 8 per cent to 9 per cent in the first year, followed by 10 per cent in the second year.

Under the proposals, employee contributions would reach 6 per cent by the second year, where necessary, with subsequent increases falling on employers.

Employer minimum contributions would rise progressively from 4 per cent in year two to 6 per cent by year six, bringing the total minimum contribution to 12 per cent.

The SPP suggested that an independent review could be undertaken after three years to assess the impact on opt-out rates, employer costs and lower-paid workers, although it stressed that the timetable should be established in legislation, with positive action required to delay increases.

Alongside higher contributions, the organisation urged the government to immediately implement the outstanding reforms contained in the Pensions (Extension of Automatic Enrolment) Act 2023, including lowering the AE entry age from 22 to 18 and removing the lower earnings limit so contributions are calculated from the first pound of earnings.

It also called for reducing or removing the £10,000 AE earnings trigger.

However, the SPP acknowledged that higher contributions could create affordability challenges for workers and employers, particularly those already facing financial pressures.

To mitigate these risks, it recommended introducing a formal "opt-down" mechanism, allowing workers experiencing temporary financial difficulties to reduce their contributions rather than opting out of pension saving altogether.

Meanwhile, the organisation criticised the government's decision to restrict pension salary sacrifice contributions to £2,000 annually from April 2029, warning that the measure could undermine long-term saving and confidence in the pensions system.

It raised similar concerns about bringing unused pension funds into the scope of inheritance tax from April 2027, arguing that the change could weaken incentives to save.

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