Careful policy design is needed to realise the benefits of increasing pension contributions while mitigating affordability challenges for poorer households, research from Oxford Economics, commissioned by Royal London, has revealed.

The research suggested that only 40.4 per cent of households with an individual in a defined contribution (DC) scheme are expected to have the required savings for a moderate living standard in retirement in 2040.

However, higher pension contribution rates could lead to an improvement in the adequacy of pension savings and result in higher disposable income for households upon retirement.

The report pointed out that this would not only alleviate the associated burden on the state of supporting those who have not saved enough for retirement, but could also lead to a larger pool of assets available to invest in UK businesses boosting economic growth.

However, the report emphasised that these higher minimum pension contributions come with trade-offs, warning that poorer households, with limited accessible savings, may find it challenging to afford increased pension contributions.

It is not only increased contributions that employees would need to cover, as the report noted that employees will also need to pay any additional costs passed on by employers in the form of lower wage rises.

Whilst the report admitted that a modest raise in the minimum contribution could lessen the financial strain on these households, it noted that this also provides the smallest benefit in terms of overall economic growth and pension adequacy improvement.

It also pointed out that affordability is less of an issue for those on higher incomes as they can afford to increase their pension contributions and will benefit from the longer-term gains.

Commenting on the findings, Royal London director of policy, Jamie Jenkins, argued that while now isn't the right time to increase contributions, "any reforms are likely to take many years to implement, so we should start planning now".

“Automatic enrolment has undoubtedly been a huge policy success, reversing the decline in workplace retirement saving that started almost half a century ago," he continued.

“However, it remains unfinished business, with contribution rates at a level that will still leave many people unable to afford the standard of living they aspire to in retirement.

“People and businesses are facing many financial pressures at the moment and now isn’t the right time to increase contributions, but any reforms are likely to take many years to implement, so we should start planning now.

“Failure to do so could lead to a much bigger cost-of-living crisis in the decades ahead as today’s younger workers reach retirement.”

Oxford Economics director of economic consulting, Henry Worthington, added: “Our latest analysis finds that many households fail to save adequately for retirement and that higher pension contributions can improve the adequacy of pension savings.

“However, we also show that poorer households may find it challenging to afford higher pension contributions―an important consideration for any potential policy reform.

“In addition, the analysis highlights the potential boost to economic growth from higher pension contributions. By 2040, UK GDP could be £0.4 to £7.4bn higher, compared to our baseline.”

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