(Not) Hitting the Target – how much is enough?
4th September, 2018
It has been nearly a year since the Pensions and Lifetime Savings Association (PLSA) has consulted on introducing National Retirement Income Targets (NRITs) for the first time to tackle the future retirement income adequacy problem. Last month the final recommendations were set out, largely in line with the original ideas. While not without some questionable and woolly clichés here and there, the publication does a great job, in a grim way, of highlighting the extent of the looming retirement crisis and the gaps in understanding and engagement which need to be filled to soften its impact in years to come.
The pivotal idea to help people understand how much they should be contributing is to adopt targets that are easy to understand. Regardless of the technicalities of the retirement income adequacy measures, the financial position of the future generations of retirees does not look rosy. A lot of them will come under pressure from the imbalance between the resources to provide income (reduced wealth – lower accumulated pension and other savings, lower property ownership) and the expected expenditure (increasing longevity, higher care costs, increased housing debt held for longer, drop in property ownership rates).
Having adopted one of the adequacy measures, the Pensions Commission’s Target Replacement Rate (in today’s terms that’s £19,162 for a median earner), the analysis shows that approximately 51% of the Generation X, 39% of the Millennials and 45% of the Baby Boomers workers are unlikely to hit this target upon retirement. That’s nearly 12 million people.
The analysis very much takes into account a contribution rate of 8% of band earnings.
Now that we have an idea of where this is all heading to, let’s look at this month’s data from the Office for National Statistics (Wealth and assets study: Attitudes towards saving for retirement, automatic enrolment into workplace pensions and financial situation). A third of automatically-enrolled workers are oblivious to even being enrolled. When asked about the safest way of saving for retirement, 55% of the respondents pointed to means other than a workplace pension scheme. This included investing in property, personal pensions, ISAs, premium bonds and savings accounts. Hiding money under the mattress didn’t make it to the list this time. At the same time PSLA points out that, somewhat not surprisingly, 51% believe that the auto-enrolment minimum contribution levels are the Government’s recommended saving rates. It will not be easy to explain and convince people in the current climate that a more adequate rate is a lot more than that.
This paints the picture of the long way the industry has to go not only in engaging and educating savers but also in strengthening the fundamental trust in workplace pension savings. I have absolutely no intention of belittling the success of the past decade but enrolling 9 million people into workplace schemes was probably not the trickiest part.
Simplicity will lie at the heart of the success of any wider pensions initiative rolled out to the public and ultimately determine its success or lack thereof. The levers of the proposed policy are anything but simple and the only way such mechanism could work is by translating them into digestible messages. As PLSA’s recommendations point out, it’s hard do imagine how this can achieved without incorporating the NRITs into the Pensions Dashboard (and it is not clear whether that has a future given the lack of support by government) and popularising them through well-thought-out media campaigns. Overhauling the disclosure of information framework to allow the pensions industry to communicate with the public more efficiently would not be a bad idea either but this seems to be going in the opposite direction so far.
The NRITs roadmap stretches all the way to 2030 and there is no way of saying where this will all land and the current political reality is not particularly encouraging from a cohesive, long-term pensions policy perspective. The clock is ticking for all those currently saving and lost time cannot be recovered. There is clearly a lot to be done now in changing the public’s attitude to and understanding of workplace pensions and, as trustees and employers, we should not overlook the importance of ensuring that we are communicating with our members in the most effective way possible to achieve the best possible member outcomes for their retirement years.