The government should outline a plan to increase minimum auto-enrolment (AE) pension contributions as the majority of defined contribution (DC)-only households are heading for inadequate retirement incomes, according to a report from Royal London and Oxford Economics.

The report analysed the impact of pension contribution reforms on households’ retirement prospects, and highlighted that an increased flow of savings into pension schemes would lead to GDP gains over the long term.

It modelled five ‘reform scenarios’ to AE rules, including existing proposals to reduce the minimum age and remove the lower earnings limit, as well as headline increases in default savings rates.

Each scenario aimed to reflect international evidence that gradual increases gave employers and employees time to adjust, moving towards higher contributions over time.

The scenarios all included reducing the minimum AE age to 18 and removing the lower band of qualifying earnings, alongside increasing minimum employer contributions to 5 per cent; increasing employer and employee contributions to 6 per cent; raising both to 7 per cent; and setting contribution rates based on reaching adequacy.

By 2040, just 36 per cent of households that had only DC pensions were expected to meet the Target Replacement Rate (TRR) threshold, while only 26 per cent were likely to reach the moderate Retirement Living Standards (RLS) benchmark.

The report stated that this highlighted the need for long-term reform to ensure more people can have a comfortable retirement.

It also estimated that, by 2060, an increased flow of savings into pension schemes would boost UK investment from the pension sector, leading to GDP gains ranging from £0.7bn to £6.2bn, depending on the scenario.

“The analysis makes clear that without higher default contributions, millions of people risk falling short of a decent income in retirement, and it sets out ways in which we might start to address this through increasing contributions over time,” said Royal London director of policy, Jamie Jenkins.

“It also illustrates that, over time, there are benefits to the economy in helping drive growth, something which everyone can benefit from.

“This is clearly a very challenging period for both businesses and households alike, and now is not the right time to start this journey, but we should make a plan to increase pension saving when that time arrives, and hopefully head off the more significant challenges of having an increasingly large and under-saved population of people in retirement.

“We hope this analysis provides an important contribution to the work of the Pensions Commission, enriching the evidence base for its recommendations.”

Oxford Economics associate director of economic impact, Alex Stewart, added: “Despite the progress made through AE, many households are expected to reach retirement without sufficient pension savings in place.

“Our research shows that reforms to minimum default contribution rates can materially improve pension adequacy.

“However, our research goes further providing a holistic assessment into how reform will impact the wider economy. We estimate that by 2060 the annual GDP gains from AE reform could be as high as £6bn.”

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