The UK has a pensions adequacy problem. Many people are not saving enough into their workplace pensions for a comfortable retirement, and a significant proportion won’t have enough to cover the basics. This future crisis makes auto-enrolment (AE) expansion inevitable. Increased employer contributions and wider eligibility for AE are on the table.
The government has said it won’t reform AE during this parliament, but change is coming. So when can employers expect to see reforms, how quickly will they be rolled out, and how much could employer contributions rise?
In Australia, employers pay 12 percent into workplace pensions. Could this be the route the UK takes on AE?
Steve Webb, partner at Lane Clark & Peacock and former pensions minister, said that it has taken Australia more than 30 years to reach a 12 percent mandatory employer contribution rate from when Australian ‘Super’ (the country’s superannuation pension fund) was first set up.
“I don’t think there’s any chance of UK employers being asked to do the same in the foreseeable future.”
Beyond this parliament
Looking beyond the pledge to leave AE as it is during this parliament, Webb thinks the most likely outcome from the revived Pension Commission, unveiled yesterday, would be a recommendation to gradually increase total contribution rates.
Employers currently pay less than employees, which the former pensions minister said is “relatively unusual by international standards”. He said there’s a fair chance that a gradual equalisation to a total contribution of 10 percent, 5 percent plus 5 percent, will be a direction of travel.
“But most people think that for people on middle incomes and above, this will still be inadequate and we should probably be aiming for 12 percent or more, again probably evenly shared between employers and employees,” he said.
The former pensions minister said he would expect any change to be phased in over multiple years rather than the government introducing a big hike in contributions overnight. For example, when AE was first introduced in the UK, employer contributions started at 1 percent for the first five years and then only stepped up to 2 percent and then 3 percent over a further two years.
Side cars
One idea the government is considering is whether pensions could have a ‘side car’ account, which would be a kind of cash account where savings could accumulate but be available for short-term cash needs, Webb said. People who do not tap into the sidecar could see surplus balances ‘tipped’ into their pension.
“This might help lower paid workers to deal with any increase in across-the-board pension contribution rates,” he said.
Emma Douglas, wealth policy director at Aviva, spent time in Australia earlier this year and said she saw firsthand how their pension system offers valuable lessons.
“The Australian superannuation – or ‘super’ – system is proving effective in terms of accumulation, with the average super pot projected to reach $545,000 by 2040,” she said.
“From 1 July 2025, Australia moved to 12 percent compulsory employer contributions. This shift is not only supporting better retirement outcomes but also easing pressure on the means-tested ‘age pension’ – their equivalent of the state pension. However, sustained investment in supporting infrastructure, such as administration systems, is essential to keep pace with growing contributions.”
Risks of a blanket approach
Higher contributions may not be the whole solution, according to Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
“Care needs to be taken that lower earners are not put in a position where they are struggling to meet their needs today in a bid to contribute higher rates to their pension when a mixture of AE minimums as they currently stand and a full new state pension delivers what they need on a target replacement rate basis (TRR*).
“However, in the current environment we also risk higher earners saving at AE minimums and realising too late that they haven’t been saving enough to sustain their lifestyle in retirement.”
Morrissey pointed to recent data from HL’s Savings and Resilience Barometer which shows that 68 percent of the highest earners are on track for a moderate retirement income.
“This may look positive, but the reality is that a moderate retirement income will not allow them to sustain their lifestyle,” she said. “Only 39 percent of them are on track for a comfortable retirement income. We need to look at how these groups can be incentivised to pay more into their pensions.”
She said any increases are likely to fall on both the employee and employer, but added: “I don’t think we will see employers asked to contribute similar rates to those in Australia as that would be a huge leap and given the extra costs on employers from increases in minimum wage (NMW) and national insurance (NI), extremely unpopular. Any changes would need to be phased in gradually.”
‘Glowing AE record’
Steve Watson, director of policy and research at NatWest Cushon, said AE has done a fantastic job of getting people into pensions, but they are often not paying enough into them. He stressed that employers are struggling with increased NI and NMW costs, while employees are still struggling with the cost-of-living crisis, making increased contributions tricky.
Watson also highlighted the difficulty younger people are having getting on the housing ladder while paying high rents. Increased employee contributions could make saving even more tricky for them.
“The question is how do you introduce higher minimum pension contributions without risking higher opt-out rates and maybe even risking jobs as employers look to mitigate higher costs?”
He added: “Current opt-out rates are still really low, but the fear will be that a change might affect that glowing record.”
AE roadmap
Douglas said: “For the UK, a vital first step is for the government to set out a clear roadmap towards a total contribution rate of 12 percent. So far, most proposals assume a split between employers and employees. A well-signposted plan will give both businesses and savers the time they need to prepare. While we’re unlikely to see these changes implemented before 2030, the groundwork must begin now.”
Jamie Jenkins, director of policy at Royal London, said that for employers and employees to be able to absorb the cost of higher contributions, the UK will need to be in a better position, where pay rises are significantly above inflation or the cost of living.
He supported the government decision to work out a plan during this parliament that can be invoked when the time is right and said that the general consensus is that a move to around 12 percent AE contributions is a sensible target.
Of course future plans can always be dropped if a government with an opposing agenda gets into power.
But Webb said if there was legislation in this parliament, which set out a timetable for post 2029, he would be surprised if a future government repealed it entirely as most people accept the need for more pension saving. “But a future government might perhaps delay the change, something which has happened in other countries.”
He said: “We are some years away from any change in minimum employer pension contributions and I would expect change, when it does come, to be gradual. But it does seem likely that some ‘levelling up’ of contribution rates between employees and employers is likely to be the eventual destination of policy, so that pensions are seen as a more even partnership between workers and firms.”
Watson said: “The challenges were recognised by the previous government too and so, looking at the scope of the commission, it seems likely that the outcome will get a high level of cross-party support. We all know the challenges and what actually needs to get done, and a commission is more likely to lay bare the tough choices for everyone to see.
“There are very few in the pensions industry who wouldn’t argue that current contribution levels are too low, but any change is about timing. The commission isn’t due to report its findings until 2027, so I would think it reasonable for any increases to contributions to be introduced no earlier than 2028 and more likely 2030.”
*The TRR is how much money someone needs to live on in retirement compared to what they earned before they retired. For example, if someone took home £30,000 a year before retiring, and their TRR is 70 percent, that means they’ll need about £21,000 a year in retirement to live comfortably. TRR doesn’t need to be 100 percent because retired people often spend less, for example, if their children have grown up and left home.
- For more on how your pension provider is performing against the rest of the industry download the Benefits Expert Guide to Workplace Pensions 2025. And you can read the guide’s headline findings here.
- Read more about CAPAData in the story titled ‘Pensions transparency enters new phase as CAPAdata launches platform with trailblazer CEO’.
- See the latest workplace pension performance data visit www.capadata.co.uk
