How national retirement targets could boost savings

The Pensions and Lifetime Savings Association (PLSA) believes national retirement income targets are needed to help savers understand whether they are putting away enough money for old age.

It launched a consultation earlier in the month, proposing three targets that would mimic the Australian Retirement Standard, which uses a three-tier system to provide targets for a 'comfortable', 'modest', or state pension only provision.

A panel at the body's annual conference chaired by PLSA defined contribution (DC) council vice-chair Carol Young discussed the proposals in more detail, how they might work and what the UK could learn from the international scene, notably Australia.

PLSA hopes  

Steering group chair Richard Butcher explained the rationale behind national retirement targets in the consultation.

"According to polling we have done [as part of the consultation] 77% don't know how much they need to save for retirement. Our proposal to create national retirement income targets can be seen as an equivalent to successful targets introduced elsewhere. Think about the successful five-a-day fruit and vegetable campaign for instance," he said.  

Alongside retirement targets the consultation also suggested the expansion of auto-enrolment to the self-employed to improve coverage, lifting contributions to 12%, development of equity release products for homeowners, greater sign posts to decumulation products and safety for independent governance committees and providers that do the sign posting.

Butcher urged the industry to embrace retirement targets.

"The beauty of pensions is they are long-term investments and compound interest can do a lot of the heavy lifting if people can be made aware of how much they need to save through retirement targets. Let us be optimistic," he continued.

While Butcher was optimistic about retirement targets, what did other panellists make of them?

Reaction

Trades Union Congress policy officer Tim Sharp said retirement targets are "potentially very useful for engaged employers and unions".

Association of Superannuation Funds of Australia (ASFA) chief executive Martin Fahy gave an international perspective to the debate. The trade body introduced the retirement standard in 2004, which was developed to help people plan for retirement after research suggested many people struggled to budget for their future needs.

Fahy argued Australia's experience showed retirement targets ushered in a number of positive developments at the same time.  

"Having a retirement target allows people to consider how much money they might need in retirement. Also it gives the discussion an emotional rather than logical dimension so individuals engage more.

"The target also allows granular details about income to be considered as nothing scares people more than a big lump sum number. Therefore a retirement income target is something people can understand and it should be embraced."

However, Fahy pointed to one lesson the UK should consider if it develops retirement targets: mortgages.

"The mistake is that we did not include housing in our retirement target. Initially we assumed that people retired without any mortgage. But one in eight people in Australia retire with a mortgage. If you don't have a house above your head when you retire, this doubles the level of retirement income you need to retire," he explained.

Other challenges

Unfortunately, Australia's experience demonstrated that retirement targets had also encountered other problems that might curb their effectives.

The emergence of the gig economy where people hold multiple jobs, the lack of property equity release and automation present obstacles to pensions as traditionally conceived.

"There is an assumption that funding in occupational systems is guaranteed but increasingly this is not true. In Australia, 275,000 have a second job and 30% of US workers sit outside of pensions in the gig economy," Fahy said. 

The implication of all this is that retirement targets and the organisations which deliver them such as employers might have to change.

"This will happen in the UK and you have to be prepared for that shift in work. An ageing population means we will not be short on things to do but the problem is they will not be neat jobs and fulfil people.

"Automation is going to be awful and it is going to be tough in retirement. It will be a case of people trying to reconfigure themselves," he continued.

However, the TUC's Sharp challenged this outlook for work and saving for retirement.

"We know what happens when people try and rely on themselves. Things like inertia and complexity are major barriers. We have tried it but people fell off a cliff. Occupational saving is going to have to be the core of people's saving."

The TUC would like to see measures to help workers navigate the more complex work environment such as flexible working and a mid-career review.  

Clearer details of how retirement targets might be rolled out should emerge from the PLSA's consultation which closes in January next year. Stakeholders that have views on retirement targets should make their voices heard.

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• Topics
• Industry
• PLSA
• retirement targets
• Richard Butcher
• Australia
• Tim Sharp
• TUC