Employers urged to enrol workers at higher contribution levels

Employers should consider changes to their defined contribution (DC) pension default arrangements to enrol employees at higher contribution levels, according to WTW.

In a new white paper on what can be done to ensure future retirement adequacy, WTW explored what steps need to be taken by employers, trustees, providers, and regulatory bodies to protect workers’ retirement prospects.

The consultancy noted that many employers offer matching DC contributions but enrol employees at minimum levels by default, and although workers can voluntarily choose to increase their contributions and receive a corresponding increase from their employer, many do not due to lack of awareness and inertia.

It warned that these missed contributions were leading to lower retirement savings and the risk of widespread pensions inadequacy for many workers.

WTW added that while pension contributions were a “significant factor” in DC pension outcomes, there were other steps that can be taken to improve retirement adequacy.

The paper highlighted the need for immediate action to address retirement inadequacy and proposed three ‘key elements’ to ensure improved outcomes: Save more, maximise returns, and make better retirement choices.

It recommended implementing a higher default contribution rate under auto-enrolment with an ‘opt down’ option.

On maximising returns, WTW highlighted the importance of taking enough investment risk at the right time to generate long-term growth, suggesting investing in predominantly growth-seeking assets in the early years of saving and retaining exposure to these assets for longer.

Finally, the paper emphasised the importance of savers making informed decisions at the point of accessing their pension pots, and called for the implementation of the Mansion House reforms that would require schemes to offer suitable decumulation solutions consistent with pension freedoms.

It also supported the use of collective DC decumulation models to provide additional income options for retirees.

"The retirement adequacy issue in the UK requires immediate attention,” commented WTW head of DC consulting, Helen Gilchrist.

“WTW is considering some bold initiatives to address the issue in a wider context but, in the meantime, there are practical steps that can be taken to ensure DC savers have a secure and comfortable future in retirement.

“By saving more, maximising returns, and making better retirement choices – together with continued efforts to improve financial literacy and education throughout the UK – retirement outcomes can be significantly improved for millions of people.

“Enrolling employees into DC schemes at a higher default level is one very practical way of addressing long-term adequacy issues. Individuals should be free to proactively lower their contribution levels if needed whilst remaining compliant with auto-enrolment rules. But we know that even those that can afford to contribute more, and know they should, often need encouragement in order to do so.

“Most people assume that the default contribution level at which they are enrolled will be adequate for their needs, which we know is currently not likely to be the case.”

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