Weighing the options when considering retirement adequacy
The origins of auto-enrolment (AE), which has transformed UK pension saving, lie in the Turner Commission’s analysis from over 20 years ago – a period that covers the financial crisis, Brexit and the Covid era, let alone several geopolitical touchpoints. It is not surprising that the minimum contributions arising from that Commission are due for a review.
After all, the Turner Commission always regarded a minimum of 8% of band earnings (that is, earnings between prescribed lower and upper limits) as lower than what many people would ideally need for an adequate retirement income.
It should be no surprise then that the basic premise of the current Drake Commission is to address retirement adequacy, with an emphasis on the lower paid. However, the available levers to improve adequacy are limited, particularly as the State Pension is out of the Commission’s scope. That leaves the only options as higher contributions, higher returns or working longer before retirement.
Taking extra risks
Before returning to higher contributions, just how achievable could those latter two levers be?
Higher returns could be achieved by taking more risk but DC schemes already tend to invest considerably in growth assets before retirement. Additionally, as members already bear the entirety of the investment risk with their DC assets, the case for introducing further return and risk is not strong.
Another option would be to reduce charges. However, the charges in many UK DC schemes are already low by global standards and are typically lower than, for example, the much-vaunted Australian Superfunds.
Working later in life before retiring (and contributing to pension savings in the interim) also sounds plausible initially. However, Department for Work and Pensions (DWP) analysis reveals that in 2025 the average ages of men and women exiting the labour market were 65.8 and 64.7. For men, that is highest age seen since the 1960s, and for women it is the highest in the ONS dataset.
These are averages, meaning that half of workers are retiring at higher ages than these figures. It would certainly appear that there is little capacity to encourage workers on a widespread basis to stay in employment to yet greater ages.
Defining adequate retirement
If those two levers have already been extended as far as is reasonable, attention naturally turns to contributions. Although there is a case for increasing minimum contributions in general terms, retirement adequacy is a complex and multidimensional problem, needing a more nuanced response than simply raising minimum contributions for all.
What constitutes an adequate retirement depends on multiple factors such as overall wealth including home ownership, family circumstances, health and spending needs. For middle and higher earners in particular, the combination of the State Pension and current minimum AE contributions is unlikely to deliver the income they would regard as adequate, especially if they hope to maintain a similar standard of living to their working life. For this group, the case for higher contributions is at its strongest.
However, for lower earners, the State Pension is the main source of retirement income and provides over 90% of the ‘minimum’ Retirement Living Standard for a single person outside London. This means that simply increasing AE minimums for this group could, in some cases, push them into oversaving relative to their needs - at the cost of immediate financial strain - especially as this group may be much more susceptible to cost of living shocks.
What’s next?
Parliament has, of course, already come close to extending AE, with a 2023 Act already on the statute books to extend AE down to age 18 and the minimum contributions to apply from the first pound of earnings. However, the commencement regulations have never been made. And let’s not forget that contributions based on all pay instead of band earnings would be a very significant change for the take-home income of the lower paid, as well as their employers.
So where does this leave the Drake Commission? Its task is challenging as it will need to navigate the diverse needs of UK DC savers with a carefully calibrated policy design which is likely to need or include tiered or tapered contribution structures. That would sacrifice some of the current simplicity of AE.
Critically, the Commission will also need to consider the timeline for implementation of higher contributions, as all savers and their employers will need time to ready themselves for higher costs.
