Viewpoint: Mapping a pathway to adequate retirement incomes for all

There is no one-size-fits-all approach to determining retirement adequacy. Industry benchmarks tend to focus on how much income people need in retirement to maintain living standards similar to their working life (as recommended by the Pensions Commission) or typical consumption needs in retirement — such as the Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards.

Whichever measure you use, the universal finding is that millions are not on track for the retirement they expect.

A way forward

Forecasts present a bleak picture but the government’s upcoming review of saving adequacy is a golden opportunity to take action to improve retirement outcomes. Ahead of this, Phoenix Insights, Phoenix Group’s longevity think tank, has recommended five priority areas we believe should be included within the review.

1. Furthering pensions automatic enrolment

Auto-enrolment has been a huge success in kick-starting retirement saving for over 11 million peopleiii but there is wide industry consensus the minimum default contribution level of 8% is too low.

Alongside implementing the 2017 auto-enrolment review recommendations, we need a plan to incrementally increase minimum contributions when the economic conditions allow. Analysis from WPI Economics for Phoenix Group found increasing contributions from 8-12% could boost pension pots for a typical 18-year-old by £96,000 by the time they reach state pension age.

2. A more flexible and engaging saving system

As we look to boost retirement saving, we also need to balance the impact on lower earners at risk of over saving and those with immediate-term financial concerns. Increasing the flexibility of auto-enrolment offers a solution to this. Ideas to explore could include asking employers to continue their part of contributions when members opt out. Sidecar saving products could also allow employees to have emergency access to their savings during periods of hardship.

Having more flexibility will benefit all savers regardless of income level, although people need to be well informed to make decisions. Auto-enrolment harnesses the principles of inertia to default workers into pension saving with little or no involvement needed, so better access to pensions information, such as launching the pensions dashboards as soon as possible, will be critical to addressing the pensions knowledge gap.

3. Better support for decumulation decisions

The impact of the pensions knowledge gap is most acute at retirement when people are suddenly faced with huge decisions about how to use their pension pot after a lifetime of minimum engagement with pensions.

People who are able can choose to take professional financial advice and there is also free, impartial guidance from the government-backed Pension Wise service to support decisions. However, data from the Financial Conduct Authority (FCA) found only 8% of UK adults received regulated financial advice in the last report year and a third of people who accessed a defined contribution pension used Pension Wise.

It’s clear that advice and guidance for people at retirement needs to be more accessible and affordable. Enabling pension providers to offer new forms of targeted support to their customers should be considered, as well as having a safety net of guided decumulation defaults to direct people to the ‘least worst’ journeys.

4. Align plans for workplace and state pension

Any change to workplace pension savings should consider the interaction between the state pension system. The state pension forms the foundation of many pensioners’ income and plays a vital role in supporting retirement adequacy. The last two decades have undergone some major changes, including the introduction of the new State Pension and increases to the state pension age.

Another independent review of the state pension age timetable is scheduled to take place within the next two years and it will be important that a plan for the future of the state pension is aligned with those for workplace pensions to ensure both systems are working together to support retirement adequacy.

5. Employment up to state pension age

Increasing the state pension age doesn’t automatically mean people can remain in work and continue to earn and save. Many fall out of work before this due to factors such as caring responsibilities and ill health and could find themselves dipping into their pension savings earlier than planned.

Research by The Fabian Society supported by Phoenix Insights found economic inactivity among people aged 60-65 is a major driver of poverty. Pre-state pension age poverty is indicative of financial vulnerability beyond the state pension, so it is vital that alongside improvements to the pension system, we can better support people to continue to earn and save later in life.

A joined-up approach

Any changes to the pension system will have a lasting impact so it’s important the government’s review is focused on the long-term and has a joined-up approach across the whole of the retirement landscape.

The coming two decades is when the under-saving crisis will really start to bite, so the time to act is now. Achieving an adequate retirement income should be a possibility for all.

Evey Tang is policy research and public affairs manager at Phoenix Group