How do you solve a problem like adequacy?

According to figures published by the Government earlier this month, 38% of working age people (equivalent to 12.5 million) are under saving for retirement when measured against the DWP's target replacement rates. When savings are compared with the PLSA's Retirement Living Standards, only 49% of working age people are on track for a moderate standard of living in retirement and only 12% can look forward to a comfortable retirement. So, what more can be done to solve the adequacy conundrum?

The size of the challenge

The roll-out of automatic enrolment since 2012 has undoubtedly been a success in terms of getting more people of working age to save for their retirement. Prior to the introduction of automatic enrolment only 41% of eligible workers in the private sector were saving in a workplace pension scheme. That figure had risen to 86% in 2021.

However, whilst auto-enrolment has gone a long way to solving the pensions participation problem; it has not yet solved the adequacy problem.

Latest Government figures show that a large proportion of the population are under saving for retirement with:

• 38% of working age people (equivalent to 12.5 million) undersaving when measured against the DWP's target replacement rates (TRRs) before housing costs (assuming people use their DC savings to purchase an annuity). This rises to 43% (equivalent to 14.1 million) if only 75% of an individual’s DC savings are converted into an annuity (with the rest taken as tax-free cash);
• higher earners are more likely to be undersaving relative to TRRs. Around 14% of those in the lowest earnings band (less than £14,500 gross pre-retirement earnings per year) are undersaving compared with 55% in the top earnings band (more than £61,500 per year). This is because the State Pension will make up a larger proportion of a lower earner's target income;
• 12% of working age people are under saving for retirement when measured against the PLSA's Minimum Retirement Living Standard. This increases to 51% and 88% when comparing against the PLSA's Moderate and Comfortable Standards; and
• lower earners are more likely to be undersaving when measuring against the PLSA's Retirement Living Standards. Around 34% of people in the lowest earnings band are projected to not meet the PLSA's Minimum Retirement Living Standard, compared with only 3% in the top earnings band.

The problem of under saving for retirement is compounded by the current cost of living crisis which is putting even more pressure on individual's day-to-day finances and making it difficult for many to contemplate saving more into their pension. At the same time, the cost of maintaining an adequate standard of living in retirement is increasing.

Rising to the challenge

Despite the slightly depressing figures published by DWP last week, there are some grounds for optimism, with some steps already being taken to address the adequacy challenge.

The triple lock means that the State Pension is set to rise by 10.1% from 10 April 2023. This means the full new state pension will be £10,600 in 2023/24, an increase of almost £1,000 across the year compared with the current rate. As the Government's figures show, a decent State Pension goes a long way to ensuring that individuals, particularly lower earners, have an adequate income in retirement.

As the value of the State Pension increases, however, reports suggest the Government is considering accelerating the increase in the State Pension age to age 68. Therefore, although people may be able to look forward to a larger State Pension in retirement they may be forced to wait longer (and, potentially, forced to work for longer) before they receive it.

As well as increasing the value of the State Pension, the Government is also supporting a Private Member's Bill which will pave the way for the extension of auto-enrolment in line with the recommendations of the 2017 Review (which the Government has repeatedly said will be implemented by the mid-2020s). If it is passed, the Bill will give the Secretary of State the power (by regulation) to extend automatic enrolment to workers aged between age 18 and age 22 and to remove the lower earnings threshold from the calculation of qualifying earnings (meaning employers and workers will pay pension contributions from the first £ of an individual's earnings).

Collective DC has also been hailed as having the potential to improve retirement outcomes for today's workers, in essence, by allowing investment and longevity risk to be pooled in retirement more efficiently than with annuities. While the jury is still out on the appetite for collective DC among UK employers, the Government is currently consulting on proposals to extend collective DC, to enable such schemes to be set up on an industry wide and/or commercial basis.

Alongside Government action, voluntary initiatives are also underway to improve worker's retirement prospects. Later this week, we are hosting a launch event for the Living Wage Foundation's new Living Pension employer accreditation. Building on the success of the Living Wage Foundation's other employer accreditation schemes, Living Wage and Living Hours, this new initiative is designed to help and encourage employers to go further and provide a Living Pension for their workers.

What more can be done?

Although the Government seems committed to extending the auto-enrolment franchise to younger workers and to ensuring contributions start from the first £ earned, they (or their successors) will need to go further if they want to tackle the pensions adequacy problem. In particular, minimum auto-enrolment contributions will need to increase to around 12%, if the level of undersaving highlighted by the Government last week is to be brought down.

While it is difficult to see this happening in the short term given current economic conditions and the financial pressures individuals and businesses are already facing, the Government could begin to prepare the ground for this by setting out a realistic timetable for moving to more adequate auto-enrolment savings rates.

In the meantime, as initiatives like the Living Pension show, there is nothing to stop employers taking matters into their own hands to ensure their workers can look forward to a more secure retirement.

Please contact us if you would like to discuss what more your scheme or organisation can do to help ensure your members / staff are saving enough for their retirement.

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