The government has been urged to make a number of auto-enrolment reforms, after analysis from the Institute for Fiscal Studies (IFS) found that around 5 to 7 million people are on track for inadequate retirement incomes.

The report, conducted in partnership with the Abrdn Financial Fairness Trust, found that 30 to 40 per cent of private sector employees saving in defined contribution (DC) pensions are on course to have incomes that fall short of standard benchmarks in retirement.

Whilst the IFS acknowledged that automatic enrolment has dramatically increased private sector employees’ participation in pension saving, it warned that key challenges remain.

In particular, the IFS found that many make low contributions, with less than half of private sector employees who save into a workplace pension contributing more than 8 per cent of their earnings.

In addition to this, a fifth of workers still do not save in a workplace pension and are missing out on their employer’s pension contribution, while low asset returns and increases in life expectancy have made it harder to attain a good standard of living in retirement.

Given these concerns, the IFS argued that changes to the automatic enrolment system are needed to ensure workers are saving enough, and to help future-proof the pension system.

In particular, the IFS said that, whilst some have suggested increasing minimum pension contributions to 12 per cent of earnings for all, a more targeted approach would be more preferable.

The IFS said that there is a particularly strong case for employees to receive an employer pension contribution of at least 3 per cent of total pay, irrespective of whether they contribute themselves.

This, according to the report, would benefit the 22 per cent of private sector employees who either opt out of their pension scheme or are not automatically enrolled due to their earnings being too low, and would also be less likely to suppress wages for lower-paid employees receiving additional contributions.

However, the IFS noted that this could risk an increase in the number of employees choosing to opt out of making an employee contribution.

Whilst it clarified that the evidence suggests the numbers opting out would be small, it suggested that a government more concerned about this could trial this suggested approach prior to implementation.

In addition to this, the IFS suggested that increased default employee contributions should be targeted at people on average incomes and above, warning that increasing contributions for those with low current earnings risks reducing take-home pay at a time in life when this can least be afforded.

In addition to changes to contribution amounts, the IFS suggested that the age range targeted by automatic enrolment should be expanded from 22 to state pension age, to 16–74, to help even more in paid work save for later life.

The IFS also said that there is a "good case" for the upper limit on qualifying earnings, which has been frozen at £50,270 since 2021–22, to be raised, at least for minimum employee contributions.

The IFS also argued that there is a "clear need" to future-proof the system further still, by indexing key parameters in the automatic enrolment system to average earnings growth.

In total, the IFS found that implementing these suggestions would boost retirement incomes by between 12 per cent and 16 per cent for those currently on track for low and middle incomes in retirement.

At the same time, it would only reduce the take-home pay of lower earners by a small amount, with estimates from the IFS suggesting that this would be less than 1 per cent fall in take-home pay.

However, the IFS acknowledged that affordability may still be a concern, suggesting that a set of reforms are needed to limit affordability concerns resulting from higher pension contributions.

In particular, the IFS suggested that any employees who face higher default pension contributions under its suggestions should be given the choice to ‘opt down’ to the minimum pension contribution rates currently in operation.

The IFS also suggested that, if the government implements legislation passed in 2023 to increase default contributions by basing them on earnings from the ‘first pound’, it should give "serious consideration" to diverting the additional contributions initially into a liquid savings account.

"It is really important to take seriously the affordability of asking for bigger pension contributions from many low-earning individuals, as well as the need for many to save more," IFS senior research economist and author of the report, David Sturrock, said.

“We suggest a way forward that would focus the encouragement of higher contributions on periods of life when people have average, or higher, earnings," he stated.

"Allowing people to opt down to lower contributions, or diverting some contributions into savings accounts, are also good options. There is a strong case for almost all employees to receive an employer pension contribution, irrespective of whether they make a contribution themselves.

"That would be a bigger change to the system – and one that would likely be of particular benefit to many low earners.”

Adding to this, Abrdn Financial Fairness Trust chief executive, Mubin Haq, said: “Auto-enrolment has been a huge success, significantly increasing the numbers saving into a pension.

"However, there’s much more it could achieve, especially for low earners who are currently missing out from an employer paying into their pension pot.

“Guaranteeing 3 per cent 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.”

PLSA chief policy counsel, Nigel Peaple, also pointed out that there is broad consensus that UK savers are not saving enough for retirement, agreeing that the government should consider these issues in the planned second phase of its pensions review.

"Only half of workers are on track to achieve the target income replacement rates put forward by the independent Pension Commission and a fifth will fall short of the minimum amount needed for a liveable retirement as defined by the Retirement Living Standards," he said.

“The PLSA has long argued for gradual increases in pension contributions, over the next decade, from the current 8 per cent of only a portion of earnings to 12 per cent of all salary, with employers paying more so that, by about 10 years from now, both employers and employees would pay the same.

“The IFS proposals provide some helpful ideas on this important topic such as increasing pension contributions to 12 per cent for most savers and considering ways to ensure contributions are affordable, if automatic contributions increase, by introducing an opt-down mechanism.

"We also agree government should consider how to help people, especially on low incomes, make “emergency savings”, possibly in a side-car mechanism, although most savers will still also need to save extra for retirement.

“These issues should be considered as part of the government’s planned second phase of its Pensions Review.”

---