A new report models the effect of raising auto-enrolment contributions in different ways, showing how each would affect different income groups. It finds that employer contributions rose to an average 5.1% in 2024, from a low of 3.4% in 2012.  

The report published on Tuesday by the Institute for Fiscal Studies, 'Automatic enrolment: trends in employer pension contributions and the impact of potential reforms', provides evidence to potentially feed into the Pensions Commission's final recommendations next year.  

The IFS report suggests that while 28% of people saving in defined contribution pension plans receive only the statutory minimum employer contribution, "a substantial minority receive considerably more", and nearly a third (31%) received contributions worth at least 6% of gross pay, particularly among the highest earners.  

Minimum contribution rates are more common among small firms and in particular industries like accommodation and food services.  

The IFS said that higher minimum contributions would improve projected retirement adequacy but warned of trade-offs: "Higher contributions mean lower take-home pay today, higher employer costs and particular pressures on low earners and minimum wage-heavy sectors such as accommodation and food services. Balancing these trade-offs will be a key challenge for the Second Pensions Commission’s policy proposals." 

Calum Cooper, who heads up pension policy innovation at consultancy Hymans Robertson, welcomed the report, but said that the impact of reform will not land evenly.   

"Employers have just absorbed higher National Insurance costs and many are already planning for future salary sacrifice changes. At the same time, productivity growth remains weak and economic uncertainty is high. Against that backdrop, employers will want to understand how any increase in minimum contributions affects their workforce, pay profile and business model," he said.   

Head of DC corporate at Hymans, Hannah English, added that the way any reform is implemented is as important as the extra cost. 

"A clear roadmap will be vital" and "long lead times and gradual escalation will be essential", she said. 

Reform must also be simple to operate as complexity creates cost, compliance risk and confusion, she argued.  

English warned: "There’s no cost-free route to higher retirement incomes. This report from the IFS makes it clear that the question for the Second Pensions Commission is how to improve outcomes while balancing affordability for workers, employers and the exchequer.  If pension reform gets those things right, it can become a success not just for savers, but for employers and the wider economy too.”  

Catherine Foot, director of the Standard Life Centre for the Future of Retirement, said the government's long-term ambition should be to remove earnings threshold limits and increase minimum contributions from 8% to 12%, agreeing this needs to be "delivered through a clear, phased and affordable roadmap". 

She also urged policymakers to explore greater flexibility within the system, including temporary opt-down or pause mechanisms, allowing people facing short-term financial pressures to remain engaged with pension saving rather than opting out altogether.