Pensions Policy Institute research for B&CE published on pension adequacy

Research published on 31 August 2022, with analysis by the Pensions Policy Institute for B&CE, the providers of the People's Pension, confirmed that the combination of auto-enrolment and a reformed state pension is "not likely to result in an adequate retirement income for the majority"¹. The finding is recorded in the third report of the Work and Pensions Committee's inquiry into protecting pension savers, published on 30 September 2022¹.

The committee's report sets out how the current system works. Automatic enrolment requires employers to enrol eligible workers, aged between 22 and State Pension age and earning above the earnings trigger of £10,000 a year, into a workplace pension¹. Employers must contribute 3% of qualifying earnings, and workers a minimum of 5%, with 1% tax relief reducing the impact on take-home pay¹. Qualifying earnings are the band between £6,240 and £50,270 in 2022/23¹. Minimum contribution rates were phased in, starting at a total of 3%, increasing to 5% in April 2018 and to the full 8% in April 2019¹.

The report records the reach of the policy: the proportion of eligible workers saving in a pension rose from 44% in 2012 to 86% in 2020, with over 10.6 million people auto-enrolled by December 2021¹. Participation has remained high, at 89% for 40 to 49 year olds and 85% for 22 to 29 year olds¹. Most employers, 98%, automatically enrol employees into defined contribution schemes¹.

On adequacy, the report cites the Pensions and Lifetime Savings Association saying "most evidence indicates that millions of UK households will not have adequate savings for retirement", and the Association of British Insurers saying a quarter of people approaching retirement are unlikely to receive a minimum standard of income, with nearly half failing to meet a personally acceptable level¹. The report gives the minimum standard as £10,900 a year for a single person in 2021/22, and the moderate standard as £20,800¹. ONS figures published on 17 June 2022 showed almost a third of working age people did not expect to have any pension provision beyond the State Pension¹.

The report also notes groups outside auto-enrolment, including people on low earnings and the self-employed¹. It records that the Government had frozen the lower earnings threshold in 2022/23 and that National Insurance contributions increased from April 2022¹. On employment status, BEIS announced on 26 July 2022 that it did not intend to change the law¹.

Why it matters for households

The research concerns the retirement income people can expect from the two main pillars of the current system: workplace saving through auto-enrolment and the State Pension. Its conclusion is that for most people the two together are not likely to produce an adequate income in retirement¹.

The practical effect falls on people whose only pension saving is a workplace scheme built on the minimum contributions, and on those not covered at all. The report identifies two groups outside auto-enrolment: people earning below the earnings trigger or otherwise not eligible, and the self-employed¹. For those who are enrolled, the minimum is 8% of qualifying earnings between £6,240 and £50,270 in 2022/23, split 3% from the employer and 5% from the worker, with 1% tax relief¹. Earnings above £50,270 and below £6,240 are outside that band.

The report also notes that the State Pension was uprated by 3.1% in April 2022¹. Anyone wanting to see what they are currently on track for can use the government's forecast service, explained in our guide to checking your State Pension forecast, and those approaching retirement can read about Pension Wise, the free guidance service the report describes as "well-regarded but under-utilised"¹.

What happens next

The report is a House of Commons Committee report with recommendations to government, and the Government has two months to respond¹. The committee recommends that by March 2023 the Department for Work and Pensions, the Financial Conduct Authority and the Money and Pensions Service publish the metrics they intend to use for evaluating the stronger nudge, covering take-up, timing and behaviour change, with the evaluation completed no later than the end of July 2023¹. It also recommends that DWP commission research into other initiatives trialled in the meantime, such as automatic appointments¹. The Government has not acted on the committee's recommendation to set a target of at least 60% for combined use of Pension Wise and paid-for advice when accessing pension pots for the first time, and rejected its recommendation for a trial of automatic Pension Wise appointments¹. Early estimates suggested around 3,500 appointments in the first month of the stronger nudge¹.