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.

Demonstrating value for money drives better retirement outcomes

The government is proposing new legislation to come into force on 1 October 2021 which will require trustees of defined contribution (DC) schemes with assets of less than £100m to carry out an annual value for money member assessment.

In this assessment – which must be published – the trustees will need to compare their scheme’s charges and default investment options with 3 larger DC schemes, which benefit from economies of scale.

Thoughts of the industry

Value for money – the trustees’ conundrum was the topic discussed at the Pensions Management Institute Symposium, where myself, Gary Davies from DLA Piper and Richard Birkin from ISIO joined Joe Craig of Quietroom to look at the issues facing trustees and how new legislation will affect schemes going forward.

What became clear from the discussions and the feedback we received during the webinar was when trustees demonstrate value for money, it actually drives up member savings outcomes as they approach retirement.

For trustees, the value for money assessment then becomes a super tool to prioritise planning and improvements to the scheme. Alternatively, they may decide to wind it up and move it to a master trust, such as The People’s Pension, which has the scale needed to meet future members’ needs.

Getting our ducks in a row

What I personally got out of the session was that it was great to discuss things with other industry professionals and realise we’re all very much on the same page on what needs to be done, and the choices trustees and scheme sponsors have.

We’re all driven to see members achieve better retirement outcomes, where their savings aren’t eaten away at by excessive charges or where weak scheme governance leaves them at risk.

Of course, charges and governance are just 2 elements that go into establishing value for money. Product functionality, default investment fund, ESG investing, service and administration and member communication and support all have to be taken into consideration too.

When looking at the full scope of what value for money actually means, it’s easy to see how smaller schemes might struggle to be competitive against larger master trusts.

Thoughts of the industry

If trustees do decide to wind up their current scheme, it’ll be very important to work together with the scheme sponsor and their advisers to create a suitable project plan. A robust provider selection process, which asks the right questions, is key in securing value for members and driving better retirement outcomes.

The extensive research carried out by The Pensions Regulator and the Department for Work and Pensions has very much highlighted the importance of improving value for pension scheme members. It was a privilege to be part of the panel debate on such a key topic, expertly chaired by Joe, and on which Dave and Richard provided invaluable insight from the perspectives of The People’s Pension and ISIO. It was pleasing to see how our views were aligned on the key issues for members and very much underlined the importance of preparation and collaboration across the industry.

The extensive research carried out by The Pensions Regulator and the Department for Work and Pensions has very much highlighted the importance of improving value for pension scheme members. It was a privilege to be part of the panel debate on such a key topic, expertly chaired by Joe, and on which Dave and Richard provided invaluable insight from the perspectives of The People’s Pension and ISIO. It was pleasing to see how our views were aligned on the key issues for members and very much underlined the importance of preparation and collaboration across the industry.

Gary Davies – DLA Piper

It’s a job for us all

Even though the new legislation focusses on schemes with assets of less than £100m, every scheme should be looking at value for money. As an authorised master trust, we must continually evaluate how we create value for our members – details of which you can find in our annual report and accounts.

Whether the scope of the legislation increases to cover larger schemes remains to be seen, but from the discussions we had at the Symposium, it’s clear that everyone in the industry is committed to delivering better retirement outcomes for savers.

Relive the action

Visit the BrightTalk website to watch a recording of our Value for money – trustees’ conundrum webinar.