Pensions adequacy: are people saving enough for retirement?

Last week I attended a forum with the Pensions Commission on barriers to pensions adequacy in the UK.

The discussion was conducted under Chatham House rules, allowing attendees to be open and honest about the challenges employers face in making sure their employees have enough to live off in retirement.

It was both reassuring and disappointing to find that the issues being described largely reflected what I see every day in practice, working as a pensions lawyer. It would be insincere of me (not to mention a breach of the Chatham House rules!) to summarise the points raised by others and present them as my own, but let me share a couple of points that I raised myself.

Auto-enrolment (AE)

A great idea with fantastic reach (approximately 90% of those eligible are apparently enrolled and receiving contributions in a workplace pension scheme), but also imperfect. The Government has already announced its intention to lower the age threshold so that workers can become eligible for AE from age 18, as opposed to age 22. Doing this will remove the inequality that currently exists whereby two workers, doing exactly the same job, can be treated differently for pension purposes.

But are there other inequalities in the AE regime that we should be looking at? AE contributions can be calculated using various different definitions of pensionable pay ( i.e. basic pay, qualifying earnings, all earnings). Does this mean that the comfort we take from knowing that a large proportion of employees are auto-enrolled, is partially false? The reality is that the actual value of pension contributions can vary greatly, depending on how contributions are calculated. Take, for example, an employee who earns a notional £60,000 in basic salary and a further £10,000 in bonuses and overtime. Using all their earnings to calculate contributions means that an 8% contribution would produce pension contributions each year of £5,600. But if qualifying earnings are used to calculate their pension contributions, they will only receive around £3,522 each year. And if basic pay is used, 8% provides £4,800 of contributions. One set of circumstances, one headline rate of pension contributions, but three very different results. 

Allowing employers to choose their own definition of pensionable pay is helpful in ensuring auto-enrolment can work effectively for different earning patterns. For example, employers in certain sectors pay their employees using a wide range of remuneration types, depending on what type of work they are carrying out in a given month. Allowing these employers the flexibility to pay pension contributions in a way that is easy to administer and easy for employees to understand is valuable. But the reality is that two people on the same income and receiving the same headline pension contributions often receive vastly different amounts. In this way, the headline of success doesn’t tell the full story.

And, a note of caution: if you are an employer, make sure that the way your payroll team is calculating contributions is the same as what’s written in employee contracts and your agreement with your pension provider. It’s not uncommon for confusion to arise between employees, their employer and their payroll / pension provider, which can mean that contributions aren’t always calculated correctly. Putting things right can be costly and an administrative burden.

The decline of defined benefit 

Excluding those in the public sector, most employees today are in a defined contribution (DC) pension arrangement, with only a small percentage entitled to any form of defined benefit (DB) pension when they come to retire. This is in direct contrast to those in previous generations, most of whom – if they had a pension at all – received a DB pension which paid them a certain amount of money every month from retirement until death (and often a spouse’s pension on their death too) and was inflation proofed. 

Does this distinction affect people’s understanding of what a pension is, and what it provides? I think so. Does a lack of understanding of the difference between DB and DC contribute to feelings of false reassurance? Undoubtedly. To some people, when you talk about a “pension” they think of an annuity – the payment of a guaranteed amount for the duration of your retirement. But pension freedoms mean that receiving an annuity is not an inevitability; and if you do choose an annuity, you will be vulnerable to what you can buy with your pot, and to annuity rates at the given time. There are no promises (guaranteed annuity rates aside). And when you bear in mind that most of us are expected to live a lot longer in retirement than previous generations, the annuities we will be able to buy with our pots are likely to be lower than we might be anticipating. 

Education is key to avoiding this disappointment. I think children should be taught (the basics of!) pensions in school. In adulthood, informative communications around AE and retirement should be accessible, understandable, and kept up to date as legislation and regulation inevitably changes. There is great work being done in the provider space to make this happen, and I see many employers embracing the challenge of increasing engagement amongst their employees by offering free financial advice sessions, hosting information roadshows or inviting pension experts in to speak to employees. But there is still work to be done if we are going to increase understanding of – and engagement with – pension saving. It may not be the most glamorous topic on the table, but it is really important.

The Commission aims to publish its final report in February next year, in which it is expected to make a number of recommendations for change. I would be surprised if increases to minimum AE contributions were not among the recommendations made. Further recommendations may come from the Government’s call for evidence on pensions adequacy for low earners and their employers, which closed on (26 October 2026). So, watch this space and get in touch with our pensions team if you would like to discuss either of the issues explored in this article.

Related News, Insights & Events