Workers saving at the minimum auto-enrolment contribution rate of 8% have only a 50-50 chance of achieving a good pension in retirement, the Pensions Policy Institute warned today
Its report, What level of pension contribution is needed to obtain an adequate retirement income? found outcomes for people automatically enrolled into defined contribution workplace pensions were 'highly uncertain'.
PPI director Chris Curry said: 'Individuals will need to contribute more than the minimum level at which they are likely to be automatically enrolled to have a good chance of achieving an adequate retirement income.'
Citing findings from the institute's report, Curry said that a median earner who starts saving at age 22 and contributed continuously until reaching state pension age would need a total contributions of 11% to have a two in three chance of receiving an adequate retirement income. Subsequently, an employee in their 40s would have to increase their contribution to 26% of their earnings.
He also noted that the rate of increase applied to the single-tier state pension would have a significant impact on the chances of achieving an adequate retirement income.
'If the single-tier pension is increased each year in line with average earnings growth...rather than the 'triple lock'...the contribution needed by the median earner to have a two in three chance of an adequate retirement income is 14% of band earnings, rather than 11%,' said Curry.
Looking ahead, the PPI believes that the government could consider a number of strategies to increase pension saving. For example, mechanisms such as auto-escalation would increase contribution rates in line with earnings.
But the institute added: 'Some form of compulsion by making saving into a pension mandatory might need to be considered if individuals opted-out in large numbers as a result of higher minimum contributions.'
Commenting on the report, Nick Slater, president-elect of the Institute and Faculty of Actuaries, said the pensions industry and policymakers needed to consider was what constitutes a 'good outcome' for scheme members.
'This research from the PPI contributes towards the question on "good outcomes",' he said. 'In a system where for a large part you get out what you put in, auto-enrolment and defined contribution will always be dominated by the question of "adequate contributions''.
Slater added: 'Clearly present measures [to encourage adequate savings rates] are not in themselves sufficient so the question for the industry and policymakers is one of how can this be done? The IFoA continues to examine this question in the context of changing demographic and socio-economic data through research and consultations.'
Lee Hollingworth, head of DC consulting at actuaries Hymans Robertson, said: 'The PPI report shows that when it comes to workplace pensions, you get out what you put in, and minimum contributions are simply not enough.'
He said the only realistic way to ensure people received an adequate retirement income was to put in place a system that would actively manage contributions towards a target income.
'This is far more constructive than simply providing them with annual update on how much their fund is worth as is usually the case now,' said Hollingworth.