Britain’s workplace pension system faces a critical challenge: minimum contribution rates are simply too low to secure adequate retirement incomes. Despite the success of auto enrolment in getting millions of workers saving, the amounts being saved may fall dangerously short of what’s needed.
This article explores pension adequacy in the UK, and steps employers may take to help address shortfall with their workers. Please contact us or email your Mattioli Woods consultant for guidance on your workplace pension strategy.
The scale of the problem
Current auto enrolment contributions hover around 8% of earnings for many workers – well below the 15% that pension experts were discussing two decades ago. Some industry experts were of the view that 26% of earnings offered the levels of income to support a ‘moderate level’ of retirement living standard.[1] The situation is even more concerning for vulnerable groups, including low earners and some ethnic minorities, who often save nothing at all for retirement.
While the current economic climate and rising business costs make immediate contribution increases politically challenging, delaying action will only worsen the long-term retirement savings crisis. As economic conditions improve, we must use future earnings growth as an opportunity to boost pension contributions.
The urgency of planning now
Pension reform cannot wait. The complexity of implementing changes to auto enrolment means employers need to begin planning immediately – the Turner Commission’s recommendations took over a decade to become reality through auto enrolment. As a result of research, in 2022, the Pensions and Lifetime Savings Association (PLSA) – now the Retirement Living Standards – proposed that in order to address adequacy shortfall, contributions needed to urgently increase to a minimum of 12%.[2] No government has yet adopted this. Workplace savings cannot afford another lost decade.
Harnessing technology
The digital revolution offers fantastic opportunities to transform workplace pensions. By leveraging artificial intelligence and big data analytics, we can move beyond the current one-size-fits-all approach to create truly personalised pension experiences.
Imagine a system where workers have access to their own behavioural data, enabling them to:
- adjust their contribution defaults based on personal circumstances
- model different savings scenarios across their careers
- receive targeted nudges tailored to their individual needs and preferences
The emerging pensions dashboard represents a crucial step towards this vision, providing the technological infrastructure needed to guide savers through their options with ultimate precision.
A practical path forward: the 12% solution
Industry experts increasingly advocate for raising minimum contributions to 12% of earnings.[1] The most palatable approach would be a ‘6 and 6’ split between employers and employees, compared to today’s 3% employer and 5% employee statutory minimums.
This structure is strategically designed: employers would bear the majority of the increase, with workers facing only a 1% rise in their contributions. While economic theory suggests that employer contributions ultimately affect wages, this approach minimises the immediate impact on take-home pay.
Smart implementation strategies
Two main approaches could guide contribution increases:
Universal age-based increases: Automatic contribution rises as workers age, taking advantage of typically higher earnings later in careers while maintaining system simplicity.
Salary-threshold increases: Contributions increase at predetermined income levels, targeting affordability more precisely but adding operational complexity.
The universal approach offers elegant simplicity, while salary-based increases could deliver better outcomes by aligning contributions with workers’ ability to pay. Both merit serious consideration, but the key is choosing one and implementing it without further delay.
The innovation imperative
Success requires combining regulatory reform with technological innovation – both carrot and stick approaches. Automatic contribution escalation throughout careers, coupled with enhanced financial literacy programmes and digital engagement tools, can help workers understand the long-term benefits of short-term sacrifices.
The message must be clear: accept modest reductions in spending power today for significantly better retirement security tomorrow. This ‘jam today, honey tomorrow’ trade-off becomes more compelling when supported by personalised projections and interactive planning tools.
Time for action
What do employees think? In a recent press release from the Phoenix Group following research on a significant population of 3,000 adults, they found that 83% agreed the Government should assess whether the current pension system allows for adequate retirement income, and 71% concurred that the Government should consider a plan to increase the minimum contribution rate.[3]
Pension adequacy varies dramatically by age – younger workers benefit enormously from compound growth over decades, while older workers face retirement shortfalls with limited time to recover. Whatever approach is chosen, it must address the needs of all demographic groups while maintaining public and political support.
With the increases to the minimum and living wages, enhancing pension contributions could be a good way to reduce the overall impact of taxation increases.
If you would like to explore implementing meaningful pension contributions, please contact us or email your Mattioli Woods consultant today. We can assist you with your contribution benchmarking and strategy.
Important information
This article is for information only, does not constitute advice and is based on pension and taxation legislation October 2025, which may change in the future.
Sources:
[1]Institute of Faculty of Actuaries | Saving Goals for Retirement
[2]Pensions UK | Five steps to better pensions: Final report
