The Labour Government may soon require businesses to make significant changes to their pension contributions as part of a broader overhaul of the UK’s pension system, in a move that some fear could become a “disaster waiting to happen”.
Chancellor Rachel Reeves is reportedly considering measures that would compel employers to increase their pension contributions in an effort to tackle the looming retirement crisis in the UK.
The Government has been discussing the possibility of adopting a pension model similar to Australia’s, which is known for its generosity compared to UK schemes.
In Australia, employers are mandated to contribute 11 percent to their employees’ pensions, a figure set to rise to 12 percent by 2025. In contrast, UK employers currently only need to contribute three percent, with the total minimum contribution for both employers and employees set at eight percent.
Rachel Reeves has reportedly held discussions with Melbourne-based asset manager IFM Investors about Australia’s pension system, particularly concerning employer contributions, according to GB News.
Additionally, the Treasury has been in talks with pension provider Standard Life to explore the benefits of increasing pension contributions in the UK.
Experts suggest that Labour may initially focus on lowering the age for auto-enrolment in workplace pensions as part of its early reforms. There is also speculation that the Government might commit to equal employer and employee contributions in the upcoming Autumn Budget.
Despite pensions being a priority for Rachel Reeves and Labour, some trade associations have expressed concerns.
Tina McKenzie, the UK policy chair of the FSB, warned: “The Government needs to take extreme care before even thinking of adding more weight to the shoulders of small firms with increases to compulsory employer pension contributions.
“Adding even more pressure on employers is a disaster waiting to happen for the jobs market.”
Mike Ambery, the Retirement Savings Director at Standard Life, told The Telegraph: “There are huge potential benefits to auto-enrolment minimum contributions rising, whether employer or employee, to both individual savers and the UK economy. Long-term, it could be a solid investment in the future”,
However, he emphasised the need for a “strong framework” to ensure that increased employer contributions are sustainable alongside economic growth.
Australia introduced mandatory pension contributions in 1992, starting at three percent, and has gradually increased the rate to 11 percent by 2024. The Labour Government’s current pension review in the UK aims to boost consolidation and investment in productive assets as its first steps toward broader reforms.
A Department for Work and Pensions (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.”
