The IFoA is concerned that many people relying on DC savings to fund their retirement are not currently saving enough to achieve the lifestyle they might hope for or expect. Our work aims to draw attention to this shortfall, and explore the ways in which public policy and individual saving habits might help to close the gap.
A survey commissioned by the IFoA in 2019 revealed that 70% of savers whose workplace pension is their main form of retirement saving, contribute no more than the minimum into their pension. The IFoA’s research suggests that those expecting to afford more financial control in retirement will need to save well above the AE minimum contribution.
Our analysis is based on the Pensions and Lifetime Savings Association’s Retirement Living Standards, which set out the cost of three distinct lifestyle levels of retirement: Minimum, Moderate, and Comfortable. We have identified three Savings Goals, linked to these three living standards:
1. People saving at the minimum level mandated by automatic enrolment, and with a full National Insurance record, should be on track to achieve the ‘Minimum’ retirement living standard.
2. Someone on average full time earnings will need to save around a quarter of their income (26%) to be on track to achieve the ‘Moderate’ retirement living standard.
3. Someone aiming to achieve the ‘Comfortable’ retirement living standard will need to save more than double what they’d need to save if aiming for ‘moderate.
There is a growing consensus that a bottom-up approach to retirement saving, based on real-life outcomes rather than traditional replacement rates, is an effective way to engage people with their future retirement and save to achieve those goals. We believe that adopting our proposed Savings Goals, combined with the PLSA’s Retirement Living Standards, has the potential to influence the behaviour of both consumers and employers, through clear and simple messages.
The report sets out practical steps that can be taken by individuals, government, employers and the pension industry in order to help individuals reach the retirement they want.
Throughout 2020, we are exploring various other rules of thumb that can help people gain a clearer picture of their current situation, and understand the steps they can take to bring their savings habits more closely into line with their retirement expectations.
The first of these follow-up papers looks at the risks people face in the DC environment, all of which might affect their ability to stay on track with their savings. The paper looks at this in the context of pensions adequacy, investment risk and longevity risk. It also suggests a simple rule of thumb that can help savers (particularly those in younger age groups) assess whether they are on track to achieve their goals. This rule of thumb works out what size of DC pot individuals should have accrued to date, in order to be ‘on track’. Later papers will explore the different mechanisms that can help those who are not on track, to mitigate that.
The Retirement Living Standards offer a useful framework by which to take a bottom-up approach to assessing pensions adequacy. But many people will be aiming for a lifestyle in retirement that is somewhere between the ‘minimum’ and ‘moderate’, or ‘moderate’ and ‘comfortable’ targets. In our second paper, we present a new rule of thumb to help people break down the retirement living standards and target something that is more tailored to their personal circumstances. Focussing on the gap between the existing ‘minimum’ and ‘moderate’ targets, the paper suggests a monthly savings goal for someone aiming for a ‘modest’ income in retirement.
Stephen Hyams discusses whether rules of thumb can help engage people with pension planning
