Daniela Silcock: Reframing employer contributions and higher, even employer-only, levels, is the only realistic route to helping savers build adequate retirement incomes.
I think we have a discourse problem with employer pension contributions. If we fix this, there will be less backlash against contribution increases, and the government might be less hesitant about increasing the so-called employer burden.
This matters more than ever, as influential voices like the Institute for Fiscal Studies are now calling for some level of employer-only contributions, and the government has just launched a pensions review with the revival of the Pensions Commission.
The change we need is simple: reframe contribution increases as deferred salary.
In effect, this is unlikely to significantly alter employer behaviour. Smaller employers have already reported slowing wage growth to accommodate pension contributions. Larger employers, who contribute more than the minimum and use pensions as a recruitment and retention tool, are less likely to cut back on pay rises regardless.
But it's the language around employer cost that's causing so much difficulty. We have allowed the idea of pension contributions as an additional business expense to dominate the debate, rather than acknowledging them as part of overall employee remuneration.
This narrative is holding us back. The government is nervous about raising employer contributions and they still haven't implemented the 2017 Automatic Enrolment Review recommendations to lower the automatic enrolment age to 18 and require contributions from the first pound earned, changes they promised would happen by the mid-2020s.
If the government is waiting for the perfect moment to impose an "employer burden," we could be waiting a very long time. We have a large national deficit, difficult economic conditions, and rising business costs, with little sign of those pressures easing. Employers will never welcome additional expenses.
Deferred salary
But if we position these contributions as deferred salary, with tacit permission for employers to adjust wage growth where needed, as many already do, we can shift the debate to where it needs to be – how high contribution levels should go, and how we plan to get there.
Pensions Policy Institute modelling shows that even median earners saving consistently throughout their working lives may still need total contributions of around 16% of earnings to maintain their standard of living in retirement. That figure is daunting, it means not only are median earners undersaving, but higher earners, who require even greater contributions, are likely undersaving by an even wider margin.
This is where the real conversation lies – not how to soften the message for employers, but how to set a clear, evidence-based contribution target, and how quickly we can reach it through gradual, managed increases.
In Australia, employer contributions are explicitly recognised as deferred salary by both government and industry. That framing has supported incremental contribution increases, reaching 12% this July. A similar structure here, with employers contributing at Australian levels and employees continuing to pay 4%, would help us reach that critical 16%.
Of course, Australia's increases happened gradually, starting in the 1990s. Even framed as deferred salary, careful planning is needed. Costs must be managed. But building the timetable is part of the process, and working with employers to support them through that journey is entirely achievable.
It's time to get to that stage. Reframing employer contributions now, and seriously considering higher, even employer-only, levels, is the only realistic route to helping savers build adequate retirement incomes.
Otherwise, we remain locked in circular arguments, paralysed by short-term concerns, while millions drift steadily towards inadequate retirements, and the costs of inaction compound for individuals, businesses, and the state.
Daniela Silcock is director of Daniela Silcock Pensions Research
