[UK] Increasing AE contributions could cut low earners’ take-home pay by 4%

A new report from the UK's leading independent economics research institute has warned that increasing automatic enrolment (AE) contributions to 12 per cent of earnings from the first pound could reduce low earners’ take-home pay by 4 per cent if higher employer costs ultimately feed through into lower wages, Pensions Age reports.

The Institute for Fiscal Studies’s (IFS) report - Automatic enrolment: trends in employer pension contributions and the impact of potential reforms - found that higher minimum contributions could materially improve retirement adequacy, particularly for younger workers, but would create significant trade-offs for employees, employers and the public finances.

The IFS revealed that, under its most extensive reform scenario, the minimum total contribution would reportedly increase from 8 per cent to 12 per cent, including a 6 per cent minimum employer contribution, and apply from the first pound of earnings up to £65,000.

In addition, the AE earnings trigger would drop from £10,000 to £4,000, while the eligible age would be reduced from 22 to 18.

According to the IFS, this approach would generate an estimated additional £17bn of annual pension contributions: £9.8bn from employers and £7.2bn from employees.

Among the lowest earners, however, it said the direct impact of higher employee contributions and the assumed full pass-through of increased employer contributions into lower wages could reduce take-home pay by 4 per cent.

The equivalent reduction was reportedly estimated at 3 per cent for middle earners and less than 1 per cent for the highest earners.

The IFS stated that the modelling did not account for behavioural changes or employer responses, including higher opt-out rates, changes in hiring or reductions in contributions among employees already saving above the minimum.

Despite this, it said economic theory and existing evidence suggested most higher employer pension costs were likely to feed through into lower wages or slower wage growth over time.

“The clearest trade-off is simply that more saving has to be paid for somehow - by individuals, their employers or the state,” the report said.

“In general, increasing pension contributions through automatic enrolment will lead to lower take-home pay today, regardless of whether the extra contributions are made by employees or their employers.”

The research institute reportedly warned that the Pensions Commission would need to balance improved future retirement incomes against lower current living standards and increased costs for employers. It additionally called for any reforms to be announced well in advance and to be underpinned by long-term policy stability and cross-party agreement.

The report concluded, “Getting this right, and striking the right balance on the trade-offs, will mean that AE can continue to evolve in a way that improves retirement outcomes for those currently on track to fall short.” 

Source: Pensions Age

(Quotes via original reporting)

A new report from the UK's leading independent economics research institute has warned that increasing automatic enrolment (AE) contributions to 12 per cent of earnings from the first pound could reduce low earners’ take-home pay by 4 per cent if higher employer costs ultimately feed through into lower wages, Pensions Age reports.

The Institute for Fiscal Studies’s (IFS) report - Automatic enrolment: trends in employer pension contributions and the impact of potential reforms - found that higher minimum contributions could materially improve retirement adequacy, particularly for younger workers, but would create significant trade-offs for employees, employers and the public finances.

The IFS revealed that, under its most extensive reform scenario, the minimum total contribution would reportedly increase from 8 per cent to 12 per cent, including a 6 per cent minimum employer contribution, and apply from the first pound of earnings up to £65,000.

In addition, the AE earnings trigger would drop from £10,000 to £4,000, while the eligible age would be reduced from 22 to 18.

According to the IFS, this approach would generate an estimated additional £17bn of annual pension contributions: £9.8bn from employers and £7.2bn from employees.

Among the lowest earners, however, it said the direct impact of higher employee contributions and the assumed full pass-through of increased employer contributions into lower wages could reduce take-home pay by 4 per cent.

The equivalent reduction was reportedly estimated at 3 per cent for middle earners and less than 1 per cent for the highest earners.

The IFS stated that the modelling did not account for behavioural changes or employer responses, including higher opt-out rates, changes in hiring or reductions in contributions among employees already saving above the minimum.

Despite this, it said economic theory and existing evidence suggested most higher employer pension costs were likely to feed through into lower wages or slower wage growth over time.

“The clearest trade-off is simply that more saving has to be paid for somehow - by individuals, their employers or the state,” the report said.

“In general, increasing pension contributions through automatic enrolment will lead to lower take-home pay today, regardless of whether the extra contributions are made by employees or their employers.”

The research institute reportedly warned that the Pensions Commission would need to balance improved future retirement incomes against lower current living standards and increased costs for employers. It additionally called for any reforms to be announced well in advance and to be underpinned by long-term policy stability and cross-party agreement.

The report concluded, “Getting this right, and striking the right balance on the trade-offs, will mean that AE can continue to evolve in a way that improves retirement outcomes for those currently on track to fall short.” 

Source: Pensions Age

(Quotes via original reporting)