Paltry employer pension contributions will leave us in poverty in old age

Most companies are putting as little as possible into staff pensions

Updated: 
Liberal Democrats annual party conference 2010

Three in five of the employers who have introduced auto-enrolment pensions are only offering staff the absolute minimum they are required to under government rules. The experts are warning that this will leave a generation of workers who cannot afford to retire.

A study conducted for the Department of Work and Pensions has revealed that 62% of employers who are already part of the auto-enrolment scheme, are contributing the smallest sums they can get away with.

Under the scheme employers have to pay in at least 1% of every staff member's qualifying earnings - and the employee has to pay in 0.8% - unless they choose to opt out of the scheme. This minimum was established to ease auto-enrolment in gently, and this small minimum will be pushed up to 3% from October 2018 (from which point the employee will have to pay 4%). Even then, the experts are warning that it won't be enough.

Worrying signs

The figures already look bad, but they look even worse when you consider that the government brought the biggest employers into the scheme first - arguably those who could afford to be a bit more generous. While a third of them were contributing at least 3% at the outset, the vast majority did the least they could get away with.

Previous ONS research also showed an alarming gulf between public and private sector workers. In the public sector, 87% of employees have a workplace pension, and 92% get an employer contribution of more than 12% of their salary. In the private sector, 73% of people get less than 8%, and more than half get something between zero and 4%.

None of this bodes well for the smaller employers set to become part of the legislation in the future, who are even less likely to offer more than the bare minimum. Steve Webb, former Pensions Minister and Director of Policy at Royal London, said: "Whilst it is great that membership of schemes is shooting up, it remains the case that for many workers, only tiny amounts of money are going in, and this is before we get to the smallest firms who seem most likely to contribute at minimum levels."

Poverty in retirement

Unless companies take a more responsible approach, this will do nothing to solve the problem of people not saving enough for retirement. Even more alarmingly, because workers know they are part of a company scheme, they may assume they are doing everything they have to in order to secure a comfortable retirement, and fail to save the extra they will need.
Royal London added: "It is vitally important for members of workplace pensions to understand that to secure a decent income in retirement they potentially need to make contributions at a much higher level than they currently do. They need to regularly review the amount that they are contributing, otherwise the income they are able to secure is likely to be not enough for the lifestyle they hoped and they may well need to continue to work much longer than anticipated."

Webb concluded: "Unless we can get workplace pension contributions up quickly to a more realistic level, we risk facing a generation of workers who simply cannot afford to retire".

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