Introducing greater flexibility in auto-enrolment (AE) pension contributions could ease financial pressures on lower income households, but it would risk adding unwanted complexity, according to a report from Pensions UK.

The association explored the impact of allowing lower AE contributions in certain circumstances to determine whether this could support affordability for struggling working households, if contributions rise overall in future.

Its Closing the gaps: can flexible contributions make retirement savings more affordable? report drew on modelling from the Pensions Policy Institute, research from Counterpoint Research, and interviews with professionals and employers.

While current contribution levels were not providing adequate retirement outcomes for many, affordability concerns were “very real”, particularly for lower earners and those under sustained financial pressure.

Pensions UK said that no single reform it considered clearly met all three goals of adequacy, affordability and fairness simultaneously, with trade-offs likely to be necessary for any AE reform.

Although some forms of flexibility had the potential to improve short-term affordability and long-term adequacy, there was limited appetite for a more complex system.

The report considered several potential AE reforms, including raising minimum contributions to 12 per cent, split evenly between employer and employee; removing the lower earnings limit; allowing workers to ‘opt down’ their contribution level; allowing some employees to receive employer contributions even if they do not contribute themselves; and adopting tiered contribution rates for different income levels.

It concluded that current AE policy fell short on adequacy for many scheme members, and raising contributions to 12 per cent significantly improved retirement outcomes for most low- and middle-income households.

While affordability pressures were genuine, savers were found to value the default pension system and were reluctant to take up options that would reduce their contributions.

Furthermore, although flexible contribution options looked attractive in principle, they could increase complexity for employers and workers, and additional research was needed to establish how they would be used if offered.

Smaller employers in particular were worried that greater flexibility could increase administrative burdens and the risk of unintended non-compliance.

“Pensions UK has long argued that minimum AE contributions need to rise,” said Pensions UK director for strategic policy and research, Matthew Blakstad.

“But we know this would exacerbate affordability challenges for some low earners. This major new research report, a year in the making, is intended to help the re-formed Pensions Commission consider how to manage that risk, particularly through building greater flexibilities into the system.

“It finds that some forms of flexibility have the potential to improve both short-term affordability and long-term adequacy. But our research with members of the public found limited appetite for added complexity from either savers or employers.

“There is no perfect answer to this policy dilemma: this research is intended to help ensure that decisions about future system design are made eyes-open to the risks and trade-offs.”

Cushon director of policy & research, Steve Watson, added: “The pensions industry is at a crossroads.

“AE has done fantastic work using inertia to help millions save for their retirements. But we must now throw all our efforts at engaging millions of savers with their pension pots to drive better outcomes.

“And, as this report suggests, it’s crucial we strike a balance between encouraging greater saving and offering the simplicity and flexibility people need.”

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