Employees should receive a 3 percent employer contribution to their pension, regardless of whether they contribute themselves, the Institute for Fiscal Studies said.
Women, part-time workers, young adults and people on lower incomes would particularly benefit, the IFS said, arguing there was a “strong case” for the change.
Instituting a 3 percent contribution could help address the problem of nearly a quarter of employees who opt out of automatic enrollment or are not automatically enrolled because their income is too low.
An estimated seven million private sector employees will see their pensions fall below minimum requirements
Less than 50 per cent of private sector workers who save in a pension fund contribute more than the 8 per cent minimum, according to research by the IFS in collaboration with the Abrdn Financial Fairness Trust.
Between 30 and 40 percent of private sector employees, or between 5 and 7 million people, are on track to see their defined contribution pensions fall short of a minimum standard of living.
This does not take into account the partner’s pension or possible future inheritances.
Laurence O’Brien, IFS research economist and author of the report, said: ‘Too many private sector employees appear to be on course to end up with a low or disappointing retirement income.
‘While there is often concern that savers are not saving enough, an additional problem is that, despite automatic enrolment increasing workplace pension enrolment, more than one in five private sector employees still do not save into a pension.’
Employers are currently required to automatically enrol employees aged between 22 and state pension age, provided they earn more than £6,240.
Pension contributions must be at least eight percent of the employee’s salary, with the employer contributing five percent and the employee contributing three percent.
The IFS said the automatic enrolment age range should be reduced from 22 to 16, and the upper limit should be raised to 74 from the state pension age, currently 66.
While the IFS said there may be a risk that more workers will choose not to contribute themselves and instead rely on their employer’s minimum contribution, it suggests testing the idea with a trial beforehand.
The IFS noted: “Compared with other ways of increasing employer pension contributions, it would be less likely to suppress the wages of lower-paid employees receiving additional contributions.”
Mubin Haq, chief executive of the Abrdn Financial Fairness Trust, said: ‘Guaranteeing three per cent from the employer regardless of whether the employee makes a contribution could increase employer pension contributions by £4bn a year.
“This would especially benefit women, those working part-time, young adults and those earning low wages.”
The institute also proposed that there should be a default contribution of 12 per cent for incomes above £35,000, with the extra coming from employee contributions, as well as an increase in the upper limit of qualifying income to £50,270.
The IFS said: “The real value of this limit has fallen significantly in recent years.”
However, he said those facing higher default contributions should be given the option to “opt out” of the current minimum contribution.
Jamie Jenkins, director of policy at Royal London, said: ‘The nation is facing a ticking time bomb, with increasing numbers of people heading into retirement with inadequate savings.
‘This is not just a social problem, but an economic challenge.
‘People should be able to retire with dignity, rather than feeling that they reach an advanced age and are seen as a burden on the working population.’
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