The majority of people are still not saving enough for their retirement, a decade on from the introduction of automatic enrolment, according to a committee of MPs.
More than 60% of people are at risk of missing out on an adequate standard of living in retirement, the Work and Pensions Committee said.
Minimum contributions into pensions are too low and many self-employed and gig economy workers are being excluded from pension saving altogether, it added.
People aged over 40, who have had limited time to build up their pension pot through auto-enrolment, are particularly at risk if they do not have access to a defined benefit (DB) pension, which pays pension benefits based on salary and length of service, the committee warned.
The blunt truth is that many employees need to save more but do not realise it— Sir Stephen Timms, Work and Pensions Committee
The committee said it recognised that the current cost-of-living crisis is not the time to ask people to pay more into their pensions.
But it urged the Government to start building a consensus now and to draw up a plan for introducing higher minimum contributions to workplace pensions in the future.
By March next year, the Government should set out its plans to build a new consensus on adequate retirement income and what the pensions system should be designed to achieve, it said.
There are good arguments for starting with an increase in employer contributions to 5%, level with employees, the committee said.
Currently, the minimum contribution is 8% of eligible salary, made up of at least 3% coming from employers and the remainder coming from employees and tax relief.
Automatic enrolment into workplace pensions started on October 1 2012.
But the report said that many newly auto-enrolled people make minimum contributions, not realising that this will not be enough to give them an adequate living standard in retirement.
Analysis by the Pensions Policy Institute showed that only 39% of households and 37% of individuals are on track for an adequate pension, according to the definition used by the Pensions Commission.
The committee said that in addition to examining ways to increase savings rates for those already in schemes, the Government should implement the findings of the 2017 auto-enrolment review, to improve retirement outcomes for many part-time and multi-jobbed employees.
The Employment Bill should be brought forward as soon as possible to improve legal protections and access to pension schemes for gig economy workers, it said.
With just 16% of the self-employed saving for a pension, the Government should also trial new ways of defaulting self-employed people into pension saving, the committee added.
Sir Stephen Timms, chair of the Work and Pensions Committee, said: “While automatic enrolment has been successful in boosting participation in workplace pension saving, many people will be feeling a false sense of security holding on to the idea that putting away the minimum amount will be enough to enjoy a fulfilling retirement.
“The blunt truth is that many employees need to save more but do not realise it. The Government must urgently consider how to boost saving, including examining the case for increasing minimum contributions, before it is too late.”
He continued: “With many struggling through a cost-of-living crisis now is not the time to ask people to find extra money for their pensions, but this does not mean that the new team of DWP ministers can sit on their hands and ignore the dark clouds gathering on the horizon for a future generation of pensioners.
“Without action to prepare the ground now, many people will feel the reality of this coming catastrophe in their later years.”
Sir Steve Webb, a former pensions minister who is now a partner at consultants LCP, said: “The select committee’s analysis is spot on.
“There is no doubt that we need a firm plan for the next phase of automatic enrolment with some dates attached.
“Moving to a contribution rate of 10% of all earnings, based on an equal share between employers and employees offers a good way forward and would avoid triggering opt-outs if it was driven primarily by firms paying in more.
“It is also important that groups such as the self-employed and those working in the gig economy are fully included in the next phase of the project.”
Phil Brown, director of policy at B&CE, provider of the People’s Pension, said: “It’s pleasing to see that the committee agrees that a consensus is needed from decision makers and the industry before the serious issue of poor pensions savings adequacy is tackled.
“While automatic enrolment has achieved so much in its first 10 years, research we submitted to the committee’s inquiry shows that the majority of people are not saving enough for their retirement.
“While navigating a way out of the cost-of-living crisis has to be the priority for Government, the potential for a pensions crisis affecting millions of people cannot be ignored.”
Rob Yuille, assistant director and head of long term savings policy at the Association of British Insurers, said: “We welcome the Work and Pensions Committee’s report on protecting pension savers, to which we were pleased to contribute industry expertise, and which reflects the risk of people not saving enough for retirement.
“The report addresses key challenges arising from the successful introduction of automatic enrolment, including the level of contributions and widening participation. These are issues that we identified in our own report earlier this year.”
A Department for Work and Pensions spokesperson said: “Automatic enrolment has succeeded in transforming pension saving, with more than 10.7 million workers enrolled into a workplace pension to date and an additional £33 billion saved in real terms in 2021 compared to 2012.
“We will respond to the WPSC’s report in due course.”
