Addressing pension adequacy with savers under substantial financial pressure

It’s been 10 years since the launch of automatic enrolment and, as a result, millions more people are now saving into a workplace pension.

However, opportunities to improve the retirement savings system remain. A survey we conducted at the Pensions and Lifetime Savings Association (PLSA) shows around a quarter (26%) of savers in workplace pensions think their current level of saving will not be enough to get by on when they retire.

It’s a worrying statistic. But the PLSA – alongside our colleagues in Whitehall and the wider pensions industry – are looking at ways we can help address the balance.

Since automatic enrolment’s introduction, the PLSA has been building a case for a pensions framework that can help everyone achieve an adequate income in retirement.

This work includes research and policy projects such as: the Pension Quality Mark; our Retirement Living Standards, our 2018 policy paper Hitting the Target: A Vision for Retirement Income Adequacy; and Guided Retirement Income Choices, our proposals to address poor outcomes when savers make decisions about how to access their pensions.

But with UK households under financial pressure from the ongoing cost-of-living crisis and two years of Covid-19 restrictions, savers are concerned for their financial wellbeing when they stop working.

We heard that those aged between 35 and 54 (29%) are the most concerned, compared to those aged over 55 (20%).

And while just one in five (20%) of those in households with an income of more than £48k have concerns, that figure rises to 35% of those in low-income households – whose total income is up to £14k – and 31% with an income between £14k and £28k.

Government case

It’s a worrying prospect and is why the pensions industry must continue to make the case to government to address this issue if we want savers to achieve a better income in retirement.

It’s why in 2019 we launched our Retirement Living Standards – which show savers what life in retirement looks like at three different levels – and updated them during 2021 to reflect trends in spending brought about by lockdown living.

The current standards suggest that, roughly speaking, a single person will need about £11k a year to achieve the minimum living standard, £21k for moderate and £34k to be comfortable.

For couples, it’s £17k, £31k and £50k, respectively. With that in mind, our survey reported that one in five people (21%) who have a pension say they save into it to ensure they have a minimum standard of living in retirement; a pension that meets all their basic needs.

Around two in five (41%), however, save to ensure they have a moderate standard of living in retirement – a pension that will meet their basic needs and allow them to do some of the things that they would like to do – while a third (33%) do so to ensure they have a comfortable living standard.

So how do we enable savers to achieve the standard of living they say they want from their pensions?

Level up

One area that we have long argued is that current contribution levels are unlikely to give people the level of retirement income they expect or need.

As the government seeks to ‘level-up’ the economy, narrowing wealth disparities between regions and different demographics, we think now is the right time for the government to commit to levelling up pensions, gradually, during the next decade.

It’s our view that, by 2030, pension contributions would be a 10% contribution, split evenly between employers and employees – with the employers asked to pay 2% more than now and employees not asked to make any additional contributions.

Then, in the early 2030s, when affordable, employers and workers would each be asked to pay in an extra 1%, so bringing the total contribution up to 12%.

We recognise the current substantial financial pressures people face, so we are not proposing any changes to automatic enrolment for some years.

However, we must at least make rm plans now to raise contributions in the future, so that people do not also face financial hardship come retirement.