Nigel Peaple
Director of Policy & Research, PLSA
Ensuring those entering retirement can do so comfortably is arguably the Pension and Lifetime Savings Association’s (PLSA) raison d’etre. The introduction of automatic enrolment into workplace pensions is helping them to do just that.
Since its introduction in 2012, almost 10 million individuals have been automatically enrolled into workplace pensions. If you add to that over one million employers that have also met their automatic enrolment duties, it paints an extremely positive picture.
The success of automatic enrolment has been a major step forward. However, to fully achieve our goal, we believe more work needs to be done.
How we encourage people to put more in their pensions
When we launched our Hitting the Target1 report in July this year, we laid out the recommendations that we believe will both get people saving more into a pension, and ensure those approaching retirement are supported to make suitable choices.
However, it’s not just about helping people at the point of retirement. Many will need support throughout their savings journey. One of the key outcomes of the report was to recommend retirement income targets to help savers know what they need to do to achieve the lifestyle they want.
Do you know how much your pension is worth?
We’d like to see these targets incorporated into the planned Pensions Dashboard; a project we have long supported. We believe the dashboard will help savers keep tabs on their pension pots, including their state pension, then, through the implementation of the targets into the dashboard, be helped towards planning their retirements.
But what would these targets look like?
Our research showed that only 23% of those aged 18-64 know how much they will need for retirement. Add to this that currently there are no widely accepted benchmarks that savers can use as a guide. It makes it difficult, therefore, to think about the level of retirement income needed in later life to live comfortably. We believe that having a clear goal in mind helps savers plan for the future.
The Association of Superannuation Funds of Australia (ASFA) has found that too and adopted a similar approach to pension target setting.
The retirement standards, which ASFA developed act as a guide to retirees’ financial needs in later life, showcase what would constitute a comfortable, modest and basic retirement plan.
For example, a comfortable retirement may see a saver owning a reasonable car, while a modest retirement may see them own an older or less reliable car and a basic retirement would see them not owning car. We believe a similar set-up would work here also.
Mid-life financial health check at 45-years of age
Employers and the government should work together to develop an ambitious guidance agenda, including a mid-life financial health check at 45.
This health check – or financial MOT if you like – would allow savers to gain a clear understanding of their current position, and what they are likely to receive as a retirement income, depending on how much they put aside into their pension pots from that point. This should also include a realistic assessment of whether an individual has sufficient property wealth to use to help fund their retirement income if needed.
However, the onus of pension contributions needs to be shared between employers and employees.
12% pension contribution split 50:50 with employer
To improve these levels of savings we also propose increasing contributions to 12% of salary, with a 50:50 employer/employee split. This would be a 4% rise from the 2019 contribution levels of 8%, of which the employee will make up 5% and the employer 3%.
As Hitting the Target highlights, planning for later life does require thought but, for savers, there could be a variety of options available to them.
What’s important now, is there is a continued effort made by the government and the industry – in tandem – to help savers achieve their goals by making the information clear, concise and understandable.
After all, it’s beneficial to everyone for those entering retirement to be able to be financially comfortable and allow them to enjoy their post-work lives.
1 https://www.plsa.co.uk/Policy-and-Research/Document-library/Hitting-The-Target-A-Vision-for-Retirement-Income