Why raising auto-enrolment contribution minimums would boost savings potential

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In just a decade, auto-enrolment (AE) has helped increase the number of people saving for retirement.

Rule changes have increased AE contribution levels in this period, further helping to embed a savings culture within UK workplaces.

Take, for example, someone who begins working on a salary of £23,000 per year, and pays the current standard monthly AE contributions from the age of 22.

They would have a total retirement fund of £324,000 by the age of 68, according to analysis from Standard Life, part of Phoenix Group.

The current standard monthly AE contributions are 3% for an employee, and 5% for an employer (8% in total). These contribution levels have been in place since 2018.

If the contribution rates set at the launch of AE in 2012 hadn’t changed, however, savers would have accumulated just £81,000 (see Figure 1).

If the total minimum contribution level was increased to 12%, though, this could lead to savers achieving around £162,000 more in retirement.

Figure 1: Raising the total minimum contribution level to 12% could greatly increase savers’ final pension pot size

Total retirement savings at 68*
Retirement savings under 2012 AE rules (total 2% contributions)	Retirement savings under 2017 AE rules (total 5% contributions)	Retirement savings under 2018 AE rules (total 8% contributions)	Retirement savings under potential future AE rules (total 12% contributions)
£81,000	£202,000	£324,000	£486,000
	+£121,000	+£243,000	+£405,000

*If beginning work with a salary of £23,000 per year and paying monthly contributions into a workplace pension at the age of 22 and assuming 3.5% salary growth per year; investment growth of 5%; annual inflation 2%; and annual investment charge 1%. This is based on current AE qualifying earnings of £6,240–£50,270. These are subject to change.

Reform implementation

Of course, in the short term AE contribution levels need to be balanced against the cost-of-living crisis, which is understandably a focus.

Over the next decade, however, we believe that increasing the minimum contribution level to 12% is sensible.

This could be combined with other measures, such as removing the current lower earnings limit and opening up AE to 18-year-olds.

Together, these measures will help to prevent future generations from sleep-walking into retirement, while thinking that their savings will be sufficient to support them in later life.

Given the current economic conditions, it will be important to carefully consider how these changes can be implemented.

These changes would likely be phased in over a number of years, so it is important for the decisions to be made as soon as is practical – in order to benefit savers.

A pension plan is a long-term investment. Its value can go down as well as up, and could be worth less than was paid in.

Calculations are intended only for the sole purpose of providing an illustration regarding the projection of savings and pensions. They should not be used with the intention to give an accurate representation of real-world outcomes.