Industry figures call for the government to incorporate IFS recommendations into its Pensions Review to boost adequacy and accessibility.
The changes – presented in a new report, published this week – are designed to “future-proof” the pensions system, simplify rules, and raise contributions while paying heed to the needs of lower earners.
The institute recommended that the government incorporate its policy ideas into its Pensions Review when it starts to consider adequacy later this year – a call supported by the Pensions and Lifetime Savings Association (PLSA) as well as several private sector pension providers.
The IFS’s report – written by Jonathan Cribb, Carl Emmerson, Paul Johnson, Laurence O’Brien and David Sturrock – made nine policy recommendations:
Auto-enrolment age limits should be expanded so that anyone earning more than £10,000 and aged between 16 and 74 is eligible.
Savers who opt out of contributing should still receive a minimum 3% employer contribution. This would particularly benefit lower earners, the authors said, as it would mean they are still accruing a pension. While such a policy could lead to more opt outs, the authors said they believed “the numbers responding in this way would be small”.
Raising contributions should be carefully balanced against the impact of having less take-home pay, especially for lower earners as higher pension payments may be difficult for them to bear.
The authors called for the government to “give serious consideration” to enabling additional contributions to be saved into a “sidecar” savings pot to help “reduce adverse consequences for working-age living standards”.
Any policy raising default contributions should be aimed at “average and above average earners”, the report said, and potentially linked to age so that those aged above 50 or 55 automatically contribute more.
The upper earnings limit for auto-enrolment – currently £50,000 – should be raised to £90,000 to ensure higher earners were less likely to lose out on contributions.
Employees should be given the option to “opt down” rather than opt out of contributions, to give additional flexibility and make pension saving more affordable. This reflects a similar recommendation made by WTW earlier this year.
Key auto-enrolment numbers – including the earnings trigger and upper and lower limits to qualifying earnings – should be linked to wage growth.
Default contribution rates should be subject to regular periodic reviews, as is currently the case with the state pension age.
The IFS’s full report is available here.
Nigel Peaple, chief policy counsel at the PLSA, said the IFS’s recommendations included “helpful ideas” around increasing contributions while giving due consideration to affordability.
He added: “We also agree government should consider how to help people, especially on low incomes, make ‘emergency savings’, possibly in a sidecar 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.”
Sankar Mahalingham, managing director of pensions at Law Debenture, said the institute had made a “strong case for expanding and enhancing the auto-enrolment system”.
“While contributions are in the gift of the employer, helping members achieve a meaningful income in retirement is a key objective for employers, providers, and trustees alike,” Mahalingham added.
“Communication and explanation of outcomes remains paramount, including supporting members in making informed decisions while saving, while approaching retirement, and throughout their years of retirement too.”
Jon Greer, head of retirement policy at Quilter, said the idea of staff receiving a minimum employer contribution regardless of their own payment was “worth consideration”.
“This would benefit the 22% of private sector employees who either opt out of their pension scheme or are not automatically enrolled due to low earnings,” he said.
“However, there is a risk that this could lead to more employees opting out of making their own contributions. A trial approach, as suggested by the IFS, could be a prudent way to assess the impact before full implementation.”
He also supported the sidecar savings proposal and expanding age and earnings limits.
