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Pensions

ONS data sparks calls for contributions hike

ONS data sparks calls for contributions hike

Mona Dohle
Tuesday 8th May 2018

The share of employees contributing to a workplace pension has surged over the past five years, yet contributions have clustered at minimum levels, sparking calls to increase minimum levels for pension contributions.

Since the introduction of automatic enrollment in 2012,  the share of employees contributing to a workplace pension has increased by almost a quarter from 47% to 73% in 2017. This amounts to more than 9.5m employees being automatically enrolled, the Office for National Statistics (ONS) said.

The changes are particularly tangible in the defined contributions pensions sector, where the share of employees contributing to a pension scheme increased from 17% to 43% over the course of five years.

Yet the data also revealed that contributions clustered at minimum levels, with the auto enrollemnt leading to an influx of savers at low rates and in turn changing the distribution of employer contribution rates, ONS said.

According to the ONS, 45% of private sector employees with DC contribution pension schemes were contributing less than 1% of  their income, and only around one in three employees were contributing 3% or more.

Simultaneously, in 2017, about half of private sector employers with DC schemes contributed less than 2% of pensionable earnings, compared to around 6% in 2012.

The government has responded to this shortfall by increasing the minimum overall contribution rate to automatically enrolled schemes from 2% to 5% of earnings as of last month, while the share of employer’s contributions has risen from 1% to 2%.

Yet according to Nigel Peaple, deputy director DC, Lifetime Savings and Research at the Pensions and Lifetimes Savings Association (PLSA), these minimum contributions should be increased even further: ““While the Government’s phased increases will see minimum contributions rise to 8% by 2019, there is a still a risk that this will not be enough to allow savers to live comfortably in retirement. We believe the minimum level needs to increase to 12% of salary over the course of the 2020s if retirees are to be financially secure” he argues.

Simon Harrington, senior policy adviser, at the Personal Investment Management & Financial Advice Association (PIMFA) adds: “We recommend to the Government to build on developments so far by designating future minimum contribution levels higher than 8%, and setting out the timescale and method for getting there.”

Andy Tarrant, head of Policy at The People’s Pension stresses that “driving home key messages around the importance of long-term savings, the power of compound interest and personal accountability must remain a priority for both the pensions industry and employers.”

Others, such as trade union body TUC, point out that employer’s shares in pension contributions could be increased. A recent TUC report highlighted that employer contributions varied greatly by sector.

While more than half of employees enrolled in DC schemes receive less than 4% of employer contribution, the problem is particularly striking in lower paid sectors such as accommodation and food services, where more than 88% of members receive lesss than 4% in employer contributions. In contrast, for higher paid sectors such as financial services, only 12% of members are affected by lower employer contributions.

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