To give people a chance to escape looming pensioner penury, the only viable solution is to increase the AE minimum contribution from 8 per cent to 12 per cent by the end of the next parliament.
There is never a good time to increase the burden on employers. In the past 14 years, we have had austerity and a pandemic. In the next decade, there may be greater challenges ahead. So, bite the bullet.
Whatever the crisis, there can be no more delay or procrastination. The government must grasp the nettle before it is too late.
Affordability for both employers and employees make this an admittedly prickly option. According to Nest Insight research, shortage of cash does not seem to be the overriding reason why employers do not voluntarily increase their pension contributions.
Admittedly, the legal minimum acts as a strong default for employers. They have complied with the law and that is enough.
Some employers just pay the minimum because it is not made easy for them to contribute more. Sheer 'computer says no' is a factor – astonishingly 20 per cent of employers were driven by the default setting in their payroll software or pension provider set up.
One in 20 say they did not know it was possible for an employer to contribute more than 3 per cent. Diverting a trickle of money (3 per cent from the employer) from pay rises to pensions may also have the added benefit of dampening down inflation.
Pensions illiquidity is a killer
More of a challenge is the extra burden on employees. If millions of Brits do not even have £100 to their name, could they afford the rise in their pension contribution rate from 5 per cent to 6 per cent of pay? My answer is yes. Let them access their own money.
Opt-outs would not rise dramatically if everyone could have instant access to an extra 2 per cent from their new 12 per cent a month pension savings.
Retirement provision often fails to reflect people’s real lives, living hand to mouth with one eye on the future for their children and their old age. Pensions need a tweak, not a massive redesign, to allow for short-term and long-term needs in one simple product.
Pensions illiquidity is a killer in the continuing cost of living crisis, while pension tax law a dampener to innovation.
The extra 2 per cent would go in a short-term savings side car with instant access with easy opt outs for the 2 per cent savings element – no complicated forms to fill in, just a text 'opt out' (just for the savings element), when the minimum contribution rate rises to 12 per cent. And keep the main pension away from temptation.
