A new report by Nest Insight suggests auto-enrolment contributions should be raised for people earning more than the median salary, but that those on lower incomes would benefit from ‘sidecar’ savings instead. The research echoes a recent proposal by the Institute for Fiscal Studies, with the pensions review giving an opportunity to convince government of the need for higher contributions despite a cost of living crisis. 

The new research, ‘How much is enough?’, in partnership with Phoenix Insights, has modelled 30 saver personas to find the right approach for people on different incomes, focussing on the trade-offs involved when saving for retirement, potentially foregoing better living standards in the present. 

The research suggested there was a case for raising contribution levels for people earning around the national median but said the picture was less clear for those earning below £2,000 per month. For people on these incomes, other savings structures, such as workplace emergency savings, “could create an alternative way to balance financial security through their working life”, according to Nest Insight.  
The researchers also said default rates for people on above-median salaries should not be set too high, "as many will have other sources of income that will make up a shortfall”. 

It proposes a system where the lowest earners are protected from oversaving, noting the state pension will tend to cover their expenses, while middle earners should be encouraged to save at a rate that will get close to smoothing their lifetime spending power. Higher earners should be encouraged to save at the same level as middle earners “but will need to plan their own approach to building on this basic level”. 

Nest says lower earners saving into liquid accounts instead of more into pensions would not just be better for them, but also for the economy. Matthew Blakstad, director of analysis and governance at Nest Insight said households should be supported with workplace emergency savings, arguing that household financial health was needed for broader economic growth. 

“We would like to see progress towards lifelong financial security for households, as part of a wider strategy for economic security and growth at the national level,” Blakstad said. 

The research comes as the government is set to look at savings adequacy in part two of its pensions review, which many expect to define new minimun auto-enrolment contribution levels. While industry bodies have been calling for a rise from 8% to 12% - split evenly between employers and employees – this option has not been palatable to recent governments dealing with business lockdowns and high consumer inflation. The pensions industry is seemingly looking to address concerns around affordability by suggesting a progressive system.  

Catherine Foot, director of Phoenix Insights, said the “broad-brush” approach to determining savings adequacy overlooks the day-to-day experience of individual households.  

“Age, sex, periods of non-earning, divorce, childcare responsibility and housing costs are just some of the many different characteristics and circumstances that influence household finances and consequently people’s ability to save,” she said.  

“Millions of adults are unknowingly heading for retirement financially unprepared, so by understanding the factors that make the biggest differences to people’s saving ability, both policymakers and individuals will be better equipped to take action to improve future retirement outcomes.”  

The IFS, as part of an initiative sponsored by the abrdn Financial Fairness Trust, last week proposed to keep employer contributions going when an employee opts out of the pension scheme, and raising default contributions on earnings above the median.