Pension contributions under auto-enrolment should be based on all of employees salary, not just a percentage, a major pensions provider has said.
NOW: Pensions said workers could be missing out on as much as £90,500 because of the way employers' contributions are currently calculated.
According to auto-enrolment legislation, contributions are only made on a band of qualifying warnings, which is set at between £5,772 and £41,865 for the current year.
This means that a worker earning £20,000 a year has his first £5,772 in earnings discounted from auto enrolment contributions, with the maximum amount contributions can be based on standing at £36,093.
According to calculations by NOW: Pensions, someone earning £27,000 a year would miss out as much as £90,549 of contributions and investment growth over 40 years of saving as a result of this banding.
Morten Nilsson, chief executive of NOW: Pensions, said that such qualifying earnings had a corrosive effect on pension pots and misleads savers.
'The 8% contribution rate is regularly quoted but the reality is nobody actually gets a full 8% - the most anyone gets is 6.9% if they are exactly at the top of the earnings band, with somebody earning £10,000 only receiving a total contribution of 3.4%, which is woefully inadequate.
'Removing band earning and basing contributions on all salary would help boost savings for all and would remove a great deal of the administrative complexity for employers.'
This call was endorsed by the Trades Union Congress. Tim Sharp, pensions policy officer, said the use of a lower earnings band discriminates against the low paid who miss out on valuable employer contributions.
'For auto-enrolment to live up to its potential to provide low and middle earners with good incomes in retirement, we need minimum contributions to go up in stages beyond current plans,' he added.
'We think there is a strong case for employer contributions to be paid on every pound of earnings.'
