‘Think big’: ex-pensions minister calls for UK contributions minimum to go up

Steve Webb says long-term plan is needed as experts warn 8% of earnings is not enough for decent retirement income

A former minister says the UK government needs to “think big” about retirement saving amid growing calls for minimum pension contributions to be increased. Under the auto-enrolment regime, an employee and their employer must pay into a pension and the government has set mandatory minimum contribution levels. But experts argue that for most people, the current figures are not enough to fund a decent retirement income. The minimum contribution stands at the equivalent of 8% of earnings, with employers obliged to pay the equivalent of 3% and the rest usually made up of 4% from the employee and 1% from the government in tax relief. The rules usually apply to anything earned between £6,240 and £50,270 (known as qualifying earnings). However, Steve Webb, a former pensions minister who is now a partner at the consultancy firm LCP, tells the Guardian: “It is widely accepted that for a lot of people, paying in the minimum rate is simply not going to be enough for a decent retirement.” In a report issued this month, the pension provider Scottish Widows said that, of those in “defined contribution” pension schemes saving about 8% of qualifying earnings, it estimated that more than a third (35%) were at risk of not being able to cover their basic needs in retirement. Webb says that “in a benign economic environment, you would ask employers to pay more” – but with businesses hit with a £25bn increase in national insurance contributions (NICs), that has all become a lot more difficult. Meanwhile, employees have been hit hard by the cost of living crisis. “So where’s this money going to come from?” asks Webb, adding: “There’s a lot to be said for a long-term plan for all of this.” The retirement specialist firm PensionBee is among those calling for the total minimum contribution to be upped to 12% of earnings. It says the government “must set out a clear plan to gradually increase minimum employer contributions, giving businesses time to adapt while boosting long-term retirement outcomes”. It adds: “At the same time, higher contributions should go hand in hand with policies that get savers engaged with their pensions earlier in their careers.” Webbs says the government could take a decision to gradually increase minimum employer contributions in future. “I have a feeling something like that is going to have to happen,” says Webb, adding that it is time to “think big” about the size of minimum contributions and whether workplace pensions could be reformed to help meet short-term cash needs or put towards house deposits.