Experts say the change could be a ‘major boost’ to employees’ financial security but to minimise the impact on businesses, increases should happen gradually

Chancellor Rachel Reeves is considering increasing the minimum level for employer pension contributions, according to a report by The Telegraph.

The government has had discussions with pension providers and asset managers about how aspects of Australia’s pension system could be replicated in the UK, including employer contributions, the newspaper reported.

Employers in Australia must currently contribute 11.5 per cent of employees’ salaries to their pension, a figure set to rise to 12 per cent in 2025. In comparison, the total minimum contribution in the UK is 8 per cent, however employers only need to contribute 3 per cent.

Government reportedly considering raising minimum pension contribution for employers – is it a good idea?
Experts say the change could be a ‘major boost’ to employees’ financial security but to minimise the impact on businesses, increases should happen gradually

Chancellor Rachel Reeves is considering increasing the minimum level for employer pension contributions, according to a report by The Telegraph.

The government has had discussions with pension providers and asset managers about how aspects of Australia’s pension system could be replicated in the UK, including employer contributions, the newspaper reported.

Employers in Australia must currently contribute 11.5 per cent of employees’ salaries to their pension, a figure set to rise to 12 per cent in 2025. In comparison, the total minimum contribution in the UK is 8 per cent, however employers only need to contribute 3 per cent.

But is raising the amount employers need to contribute to pensions the right move for the government to take, and what are the implications for businesses?

Nigel Peaple, director of policy and advocacy at the PLSA, told People Management his organisation has long advocated that the minimum pension contribution should rise from the current 8 per cent of earnings to 12 per cent.

He said: “To minimise the impact on savers and employers, the increases should happen gradually, as they did in Australia, with employers paying more so that, by about 10 years from now, both employers and employees would pay the same.

“This approach of a 50/50 split between employers and employees would strike a fair balance; it would involve higher contributions for employers compared to the current UK rules but much lower ones than traditional UK pensions in which the employer usually paid around two thirds of the cost.”

Steve Watson, director of policy and research at NatWest Cushon, agreed any increases would need to be done over time to mitigate issues of affordability. “A gradual step-by-step change would make the most sense,” he said.

“The main thing is that more people save more money into their pensions to help them enjoy a comfortable retirement. It’s important the government finds the most balanced way to make this happen without disengaging savers and disrupting employers,” Watson added.

Steve Nicholls, managing director at Executive Connexions, said the move would be a “major boost” to long-term financial security for employees. “This change could especially benefit younger workers who might not prioritise retirement savings early in their careers,” he added.

However, Ian Moore, managing director of Lodge Court, highlighted that the move would present challenges for many employers, particularly small and medium sized ones. He warned this could lead to cost-cutting measures such as hiring freezes. “Employers also might limit wage growth or cut other benefits to offset the increased costs, affecting employee satisfaction,” he said.

Peter Cheese, chief executive of the CIPD sent a letter to pensions minister Emma Reynolds in July calling for a “holistic review of pension adequacy”, which stated the organisation is “concerned that the minimum total pension contribution rate of 8 per cent is not going to be enough to provide a reasonable income in retirement for most workers”.

The letter laid out further recommendations, including requiring all employers to publish details of their workplace pension in their job adverts; the extension of auto-enrolment to 18 year olds; and the reduction, or abolition, of the lower earnings limit.

Charles Cotton, senior pay and reward adviser at the CIPD, told People Management: “Increasing the amount that employers must contribute to workplace pensions will increase their payroll costs, which could result in lower profits, lower salaries, and higher prices.

“This is why it’s important for the review to work out the period that higher contributions should be phased in over. As well, we would like to see a focus on helping employers improve their productivity, so that they are more able to absorb these extra costs.”

He further commented that government data shows most employees are not saving enough into their workplace pension to give themselves a chance of having a reasonable income in retirement, stating: “That is why we recommend the government carries out a holistic review to work out the best way to improve pension outcomes.

“The review should consider how much extra money needs to be contributed, over what period should this be phased in, and whether paying in more earnings makes sense for low-waged earners.”

A DWP spokesperson said: “Automatic enrolment has had a positive impact in transforming the pensions landscape by enabling 22 million workers to save into a workplace pension.

“As part of our landmark pensions review, we will explore options to expand on this success to ensure the pensioners of tomorrow have the dignity and security they deserve in retirement.”

Under a new framework proposed by the Financial Conduct Authority, intended to “drive value in a complex and growing pensions market”, the government could also be set to introduce a ‘traffic light’ system for pension schemes. They would be rated red, amber or green, with a green rating demonstrating the best value for money.

The news follows the announcement last month of further changes to “make work pay”, in the form of an overhaul to the remit of the Low Pay Commission (LPC), which will ensure it takes into account the cost of living when it makes future recommendations to the government on the minimum wage.

The government has also instructed the LPC to narrow the gap between the minimum wage rate for 18-20 year olds and the National Living Wage, with the goal of eventually reaching a single adult rate.

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