Is auto escalation the single biggest change that could improve pension adequacy?
Millions of UK workers are heading towards a retirement savings shortfall, and the consequences are becoming harder to ignore.
Two in five Brits, around 15.3 million people, won’t be able to cover even their basic living costs in retirement, according to the latest National Retirement Forecast from Scottish Widows.
Pensions UK estimates that a single person needs £13,400 a year to cover their essentials, “with some left over for fun.” But millions are on track to fall short of this baseline, let alone reach the moderate or comfortable retirement tiers.
These people risk entering retirement unable to meet fundamental costs like food, heating, and housing.
While auto-enrolment has successfully expanded pension participation, the minimum contribution levels - 8% of qualifying earnings, split between 5% from the employee and 3% from the employer - are widely recognised as inadequate for securing a decent retirement income.
Financial experts typically recommend saving around 15% of total salary annually to achieve a more sustainable outcome. But in practice, most employees are sticking to the minimum, and many employers are doing the same. This creates a sizeable shortfall between what’s being saved and what will actually be needed.
So, how can employers support workers who need to save more, but feel unable to stretch their budgets right now?
Making saving easier with auto escalation
One often underestimated but highly effective approach is auto escalation, a mechanism that allows employees to commit in advance to gradually increasing their pension contributions over time, typically in line with annual pay rises.
While the concept isn’t new, it remains underutilised in many workplaces, despite its potential to drive better retirement outcomes.
Auto escalation works because it tackles one of the biggest barriers to saving, behavioural inertia. Rather than asking employees to make a large jump in contributions all at once, it spreads the increase in small, manageable steps.
When timed with a salary review, a 1% rise in pension contribution for instance can feel painless, as take home pay still increases, but the employee also boosts their long-term savings.
From a behavioural perspective, auto escalation makes use of the power of simplicity and automation. Once employees opt in, very few opt out. It removes the need for constant decision-making and provides a clear pathway toward better retirement outcomes with minimal effort required from both the employer and employee.
More importantly, employees usually respond positively to this approach. It enables them to take control without feeling overwhelmed, and many appreciate the sense of progress it offers. Even small increases, 0.5% to 1% per year, can have a significant impact on their pension pot over time.
Low-cost, high impact solution for employers
For employers facing growing financial pressures, including rising National Insurance costs and limited headroom to increase pension contributions, auto escalation offers a compelling alternative.
It’s a cost-effective, low-effort way to help employees build better retirement outcomes over time, without increasing employer spend.
While some organisations choose to enhance engagement with matching incentives, auto escalation doesn’t require it. The real power lies in its simplicity: small, automated increases aligned with salary reviews that most employees barely notice, but that make a big difference over time.
However, successful implementation does require the right infrastructure. Payroll systems must be able to support automated increases, and communication strategies should clearly explain how the process works and the long-term benefits.
Administrative challenges can be a barrier, but these can often be addressed through collaboration between HR, payroll, and benefits teams.
Big step towards pension adequacy
Auto escalation isn’t widely adopted, but it could be a game changer. For employers, it’s a practical, scalable solution at a time when resources are stretched, but the need to support long-term financial wellbeing has never been greater.
As organisations review their workforce strategies and employee benefit priorities, now is the time to put auto escalation on the agenda.
Supplied by REBA Associate Member, Howden Employee Benefits
Howden provides insurance broking, risk management and claims consulting services, globally. We work with clients of all sizes to provide dedicated employee benefits & wellbeing consultancy.