Employers should pay into workplace pensions even if their employees don’t, says IFS

There is a “strong case” for most workers receiving money from their employer into an occupational pension scheme, even if they do not contribute to it themselves, according to a report by the Institute for Fiscal Studies (IFS).

Currently, employers must enrol employees aged 22 to 66 who earn at least £10,000 a year before tax into a pension scheme.

Employers must pay 3 percent of their earnings into the program and employees 5 percent, but if employees choose to opt out, employers do not have to pay anything.

As part of a series of reforms to improve retirement incomes, the IFS and the abrdn Financial Fairness Trust have said in a report that employers should pay at least 3% of total wages, regardless of whether their employees opt out.

The company said the move would benefit 22% of private sector workers who opted out of a pension plan or were not automatically enrolled in one because their earnings were too low.

IFS said that while there was a risk that more employees would opt out of contributing, a trial approach could be carried out before implementation.

The age bracket for automatic enrolment should be widened from 22 (state pension age) to 16-74, so that even more people in work can save for later life, the statement said.

Other reforms proposed by the study include increasing default employee contributions for middle and upper-income earners.

The IFS said the default total contribution rate could be 12 per cent for earnings above £35,000, with additional contributions coming from employee contributions.

This would mean workers would pay 9 percent of their wages, not 5 percent.

The company said implementing its suggestions would increase retirement income by 12-16 per cent (between £1,400 and £2,100 a year) for people currently on low and middle incomes in retirement.

Laurence O’Brien, research economist at the IFS and author of the report, said: “While the state pension currently provides a solid base income in retirement, most will want or need to supplement it. Too many private sector workers seem set on a path to low – or disappointing – retirement incomes.

“While there are often concerns that savers are not saving enough, an additional concern is that despite automatic enrolment increasing the number of people enrolled in occupational pension schemes, more than one in five private sector workers are still not saving for retirement.”

A Department for Work and Pensions (DWP) spokesman said: “We will ensure that tomorrow’s pensioners have the dignity and security they deserve in retirement by delivering our groundbreaking pensions review to boost investment, increase pension pots and tackle waste in the pension system.

“More than 15 million savers could benefit from our new pension scheme law – which could give the average earner £11,000 more in their defined contribution fund by the time they retire.”