Will pension savings be adequate for retirement?

The figures speak for themselves

Since 2012, 10.6m employees have enrolled in a workplace scheme, with an additional total of £28.5bn saved into UK pension pots each year.* But there remains the question of whether the average auto-enrolled member is saving enough for their retirement.

In its 2005 review, the Pensions Commission was clear that at least 16% of qualifying earnings – double the current minimum contribution – would be required to provide an adequate retirement income, with half expected to come from a workplace pension and the other half from additional voluntary saving.**

A ‘basic’ or ‘comfortable’ retirement?

But new research shows this hasn’t happened. Our report, Pension Adequacy: A Pension Saver’s Perspective,*** finds that most auto-enrolled pension savers and employers are anchored to the minimum rate, with most savers wrongly believing that they are on track for a ‘moderate’ or ‘comfortable’ standard of retirement living, based on the PLSA Retirement Living Standards. Just 7% of savers are aware that the current minimum contribution will only provide a ‘basic’ retirement income, and worryingly, 4 in 10 people believe that because the contribution rates have been set by the government, they are saving enough.

Additionally, the idea of additional voluntary saving is far from reality; almost half (43%) of all savers haven’t considered paying more into their pension, almost half (46%) don’t know they’re allowed to pay in more than the minimum, and two-thirds (64%) of people have less than £10,000 in additional savings.

If you accept the idea that contribution levels should be increased to prevent poor saver outcomes, questions remain:

  • How much should this increase be?
  • Who should bear the burden?
  • How do we encourage people to pay more if they can afford to?
  • Should it be made easier for them to pay more as they get older?

With many savers not knowing they’re allowed to increase their contributions or how to pay more in, our research is clear that more can be done to help savers understand the options open to them.

What needs to be done for a positive saver outcome?

There’s a growing consensus across the pension industry that an increase in contributions is required to lead to positive saver outcomes. But with so many questions around how this could or should be done, we’re calling on the government to set out plans for a review of the minimum contributions required for auto-enrolment.  We’re also asking them to outline a timeline for implementing the recommendations of the 2017 automatic enrolment review once economic circumstances allow.

While millions of people are rightly concerned about the increasing cost of living, a very real problem is building up for millions in their retirement and it is crucial that the government comes up with a plan to tackle this.

The deeply troubling findings of this research reveal that millions of hardworking people are simply not saving enough for their retirement. While affordability obviously plays a role in this, the research shows that in most cases, people believe that because they’re saving what they’ve been told to by those who run the country, they’re saving enough. While auto-enrolment has had a truly successful first decade, government must now plan ahead to ensure that over the next 10 years, auto-enrolment members are saving enough to provide for a comfortable retirement.

It’s clear that some need to save more for their retirement and the government needs to act to ensure that the minimum contribution level helps them do this. This is something that must be addressed to ensure the continuing success of auto-enrolment.

*Department for Work and Pensions figures (2021)

**Pensions Commission (2005)

*** Pension Adequacy: A Pension Saver’s Perspective report, prepared by Ignition House and published by B&CE in March 2022.

A ban on combination charging structures could cost pension savers £1,000s

The government is reviewing plans to introduce a universal single annual management charge for all automatic enrolment pension schemes. In November last year (2021), the results of the Consultation on Permitted Charges within Defined Contributions Pension Schemes were published by the Department for Work and Pensions (DWP). The results confirmed the ban on levelling cash charges on pots worth £100 or less. At the same time, the DWP, which had also consulted on the idea to introduce a single universal annual management charge for workplace pension schemes, announced it would propose next steps on this issue ‘shortly’.

A service that works for our members

While we agree with the government’s good intentions to provide greater clarity and transparency for customers when comparing charges, we don’t think the introduction of a universal single charge is the best way to do it. Pension providers like us have, over time, created a service that works for our members. A little over 2 years ago we introduced a new combination charging structure for our 5m plus members. Any moves to introduce a flat fee for all auto-enrolment schemes would mean our combination charging structure would be outlawed, as it includes a rebate on the 0.5% management charge and a cash charge. This rebate begins once a saver has £3,000 or more in their pension pot, and it increases the more they save.

We think this charging structure works for our membership. We’re a not-for-profit organisation, which means we focus on making things easier and fairer for our members rather than worrying about paying profits to shareholders – we call it ‘profit for people’. We give back a total of more than £1m a month to a considerable proportion of our members, and we’re proud of this. As auto-enrolment matures, this figure is only set to grow, and based upon current charges, we estimate this figure might rise to £34.5m a year in just 5 years’ time.

An additional 3 years’ retirement income

Based on the current combination charging structure, the average earner, saving over their working life with The People’s Pension, could see their lifetime annual management charge eventually fall by more than half to just 0.23%. But if the government implements a universal charge, they could potentially lose out on almost £27,000* – around an additional 3 years’ retirement income.

When we introduced our charging structure in 2020, fairness was a motivating factor because we wanted to reduce the cross subsidy of small, dormant auto-enrolment pots for members who have accumulated a larger pension. 

Bringing in a universal charging structure only for automatic enrolment pension providers would distort the market and put the millions of people saving through auto-enrolment at a disadvantage compared to those saving through retail schemes. This could lead to some workplace schemes increasing their charges for all members.

Our view is shared across the industry

We know that our view is shared across the industry; respondents to last year’s consultation cautioned that the change could lead to fewer providers offering pensions in the auto-enrolment market, which would consequently lead to a reduction in investment offerings.

There are numerous ways to solve the perceived problem of transparency within workplace pensions but banning combination charging structures like ours isn’t one of them. We think that this would be unfair to hardworking savers by removing incentives to save more for retirement, not to mention unfairly targeting auto-enrolment savers.

Patrick Heath-Lay, Chief Executive Officer at B&CE, provider of The People’s Pension

*Assuming a member aged 23 with a starting fund of £15,000, a salary of £30,000 per year, paying 8% gross contributions, investment returns of 5% per annum, inflation of 2.5% per annum, and a retirement age of 68, this could add up to an extra £26,853.11. 

Pension Adequacy: The Pension Saver’s Perspective

Attention is now turning to whether statutory minimum contribution rates, currently set at 8% of band earnings (including tax relief) are sufficient. As far back as 2005, The Pensions Commission thought that 16% of band earnings was the minimum required to reach a target replacement rate of two-thirds of pre-retirement earnings for a minimum earner. 8% was to come from AE with the other half coming from additional savings.

There is a growing consensus that an increase in minimum contributions would lead to an improvement in saver outcomes.  However, little work has been done to date to explore what savers think of current levels, or if savers are even aware they’re expected to save more? Can they accurately assess how much they will need to have saved for a ‘moderate’ or ‘comfortable’ lifestyle? And what do they feel the appropriate response from the government and pensions industry would be?

Our research, which involved talking to people aged 22-55, shows that millions of savers are making the minimum contribution to their workplace pension while a significant proportion don’t have significant savings.

Download our Pension Adequacy: The Pension Saver’s Perspective report