Higher contributions could improve people's finances in retirement, but leave them with less money in their pockets today
Millions of workers could see their take-home pay squeezed under plans to get Britons saving more into their pensions, new research suggests.
The warning comes as an estimated 15 million working-age people are thought to be saving too little to maintain their standard of living in retirement.
The Second Pensions Commission is considering the future of workplace pensions, including the automatic enrolment system which requires employers to automatically put eligible workers into a pension.
Under the current system, employers must contribute at least three per cent of qualifying earnings, while the total minimum contribution from employers and workers is eight per cent. These contributions generally apply to earnings between £6,240 and £50,270.
Research from the Institute for Fiscal Studies (IFS) looked at what could happen if these rules were changed to get workers saving more.
One scenario would increase minimum pension contributions to 12 per cent and extend the upper earnings limit from £50,270 to £65,000.
The IFS estimates this could reduce take-home pay by 1.2 per cent overall, once higher employee contributions and the potential impact of increased costs for employers on wages are taken into account.
The biggest potential hit comes under a more significant change to auto-enrolment.
If the 12 per cent contribution instead applied from the first pound someone earned, rather than only earnings above £6,240, the lowest-earning third of employees could see their take-home pay fall by four per cent.
However, these are scenarios modelled by the IFS rather than confirmed Government policy.
The impact could also vary significantly depending on where someone works.
Among private sector workers saving into defined contribution pensions in 2024, 28 per cent received only the statutory minimum employer contribution of three per cent of qualifying pay.
By comparison, 31 per cent received employer contributions worth at least six per cent of their gross earnings.
Workers at smaller businesses were much more likely to receive the minimum.
Almost half, 47 per cent, of savers working for employers with fewer than 50 staff received the lowest contribution, compared with just 17 per cent at businesses employing 10,000 people or more.
There was an even bigger divide between industries. More than half, 52 per cent, of pension savers working in accommodation and food services received the minimum employer contribution, compared with just five per cent in finance and insurance.
Higher earners were also more likely to receive generous pension contributions from their employers.
Some 46 per cent of savers in the highest-earning quarter received employer contributions worth at least six per cent of their gross pay, compared with 22 per cent among the lowest-earning quarter.
The findings come as pensions consultancy Hymans Robertson separately warned that significant numbers of employees could be at risk of falling short in retirement.
Mark Stansfield, Senior Actuarial Consultant at the firm, said: "Retirement adequacy is increasingly becoming a business issue, not just a pensions issue.
Many employers are already dealing with the effects of employee financial stress and changing working and retirement patterns, all of which can impact productivity, workforce planning and long-term business performance."
Hannah English, Head of DC Corporate Consulting at Hymans Robertson, said workers were already having to balance saving for later life with their finances today.
She said: "The question is not simply whether contributions should rise, but whether current support is helping different groups achieve better retirement outcomes in a sustainable and fair way."
Hymans Robertson warned that increasing pension contributions could raise costs for employers without necessarily solving the retirement savings problem for every group of workers.
