Over time, good ideas start to age. Take, for example, automatic enrolment into workplace pensions, which is now eleven years old. In some respects, it has been highly successful – about 80% of employees are now benefiting from pension contributions compared with 46% in 2011. However, other aspects of the legislation have started to look outdated after more than a decade.

Auto-enrolment

Since April 2019, the mandatory minimum level of contributions has been 8% of band earnings (those between £6,240 and £50,270 in 2023/24). Of that 8%, the employer must pay at least 3%, with the employee picking up the balance. Those percentages were legislated for in 2008, almost another era in financial terms. Were automatic enrolment being designed today, the minimum contribution rate would be considerably higher.

Global pension contributions

A report in September from the capital markets focused think tank New Financial neatly summarises the problem with 8%. It says, “… contributions are not high enough to ensure a comfortable retirement for the majority of people in the UK.” The report finds that in many other countries, minimum contribution rates are higher. Both Denmark and Sweden have a minimum of 15%, while Australia and Ireland are moving their contribution rates to 12%. As well as higher contributions, an international comparison reveals that in all other markets, employers pay more than employees (and in Australia employers pay the entire minimum contribution).

The UK Pension contributions

In the short term, the chances of the UK modernising its mandatory pension structure are limited. At the time of writing, there is a private member’s bill – not a government bill – going through parliament that opens the way to higher contributions by making the 8% apply to all earnings up to £50,270. The backdrop of a cost of living crisis and an impending general election do not provide the conditions in which the government – or opposition – would want to call for higher pension contributions.

Nevertheless, the issue will not disappear. As the report says, “The biggest single lever that can be pulled to increase the value of a future pension is the contributions paid into it over time.”

And you do not have to wait for the government, of whichever variety, to pull that lever.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.