Up to seven million workers in the UK may face a grim retirement due to inadequate pension savings, according to a recent report by the Institute for Fiscal Studies (IFS). The think-tank found that 30% and 40% of private sector employees contributing to defined contribution pension schemes are unlikely to meet comfortable income benchmarks in their retirement years. The findings reveal that one in five workers is not contributing any money to their pension pots, while less than half are saving more than 8% of their earnings.
The IFS suggests that employers should contribute 3% of total pay into a workplace pension, even if employees themselves do not. It also proposes higher ‘default’ contribution rates of 7% for employees with above-average earnings.
Facing a bleak pension outlook
According to the report, this approach could benefit the 22% of private sector employees who either opt out of their pension scheme or are not automatically enrolled due to low earnings. The IFS recommends a trial approach before full implementation and advocates for widening the age range for automatic enrollment from the current 22-to-state pension age to include workers aged 16 to 74. Laurence O’Brien, a research economist at the IFS and an author of the report, stated, “Too many private sector employees appear on course to end up on a low – or disappointing – retirement income.
Despite automatic enrollment boosting workplace pension membership, more than one in five private sector employees are still not saving in a pension.”
David Sturrock, a senior research economist at the IFS, added, “There is a strong case for almost all employees to receive an employer pension contribution, irrespective of whether they contribute themselves.”
Mubin Haq, chief executive of the Abrin Financial Fairness Trust, emphasized the importance of this contribution structure, noting that it could boost employer pension contributions by £4 billion per year and particularly benefit women, part-time workers, young adults, and the low-paid. The Department for Work and Pensions (DWP) spokesperson commented on the ongoing efforts to reform pensions, stating that the government’s landmark pensions review aims to boost investment, increase pension pots, and tackle waste in the pension system. The IFS’s recommendations highlight the urgent need for policy changes to secure the financial well-being of future retirees.
