How national income targets can boost pension saving

Yesterday, the Pensions and Lifetime Savings Association (PLSA) proposed a number of reforms to boost pensions adequacy, including national retirement income targets to show the lifestyle people could afford on different levels of income.

In the Hitting the target: A vision for retirement income adequacy report, the trade body presents the final recommendations of its consultation into pension saving.

It also says minimum contributions under automatic enrolment (AE) should be raised from 8% of band earnings to 12% of total salary by 2030, and schemes should be required to signpost to ‘appropriate product options' at retirement.

The report stems from the PLSA's Hitting The target consultation, where it presented its assessment of public policy on retirement income provisions and introduced a series of proposals aimed at reforming public policy and industry practices, in a bid to facilitate better retirement outcomes. The consultation, which closed in January, received responses from 100 stakeholders from over 50 different organisations.

National income targets

The PLSA warns that despite the success of AE, the vast majority of savers do not understand retirement savings, do not know what sort of income they should aim for in retirement, or how to achieve it.

According to its research, four in five people are not confident they are putting enough aside for later life, which means some 30.4 million working-age people across the UK will find that their incomes will be insufficient to meet their retirement needs.

It recommends the UK develops and implements a series of targets, which build on the current analysis of what people need in retirement. It has even commissioned an independent research institute to identify and build the targets, which will be released in early 2019.

These targets should be adopted across the pensions sector, with usage to include scheme communications, pension statements, the Pensions Dashboard and pension calculators, and by the Single Financial Guidance Body (SFGB).

Responding to the report, shadow pensions minister Jack Dromey said: "While AE, instituted by the last Labour government, has meant millions more workers saving into pensions, far too many are saving the bare minimum that will not give them a good pension to retire on. The work by the PLSA means that the public can be clearer about what they will need when they retire and how much they need to save to achieve that."

Age UK charity director Caroline Abrahams also welcomed the PLSA's recommendation: "The pension flexibilities, introduced in 2015, have changed the game for people reaching retirement. However we still don't know the full impact this will have, which makes it important that people are able to plan more effectively for their futures.

"We believe that retirement income targets, which set out products and lifestyle choices that people can afford based on different levels of retirement income, have an important role to play. The PLSA research highlights some concerns - for example, that people don't know how much they should be saving and think the minimum auto-enrolment level is a 'recommended' amount - so anything that helps people understand how much money they will need in the future and how to achieve it is clearly very welcome."

However, national retirement income targets need full government support to maximise their success, according to Hymans Robertson head of guided outcomes Paul Waters.

"A single, government supported, default target could vary dependent on salary but should be presented in a way that can be communicated simply and effectively.  For maximum engagement, however, any adoption of a universal target is best managed at an individual level through the employer's workplace pension scheme," he said.

Now Pensions chief executive Troy Clutterbuck added: "Integrating retirement income targets into the Pensions Dashboard would be a natural fit, giving savers a simple indication of whether they are on track with their saving. But, giving a warning should be just one part of the equation. To be effective, it's important that savers have the right information to take action."

Default pathways

The association called on the implementation of a new regulatory framework, where schemes and providers signpost savers to appropriate product options at retirement. These options would be selected by trustees and independent governance committees and would adhere to government standards. These standards will: operate in the members' interests; provide a sustainable income; and provide flexibility for capital withdrawals.

The PLSA said the emphasis of public policy on retirement income needs to be placed on inertia-based interventions - such as default pathways - rather than on policies grounded on individual choice and engagement.

Speaking at the launch of the report, PTL managing director Richard Butcher said: "To be quite clear - these recommendations do not undermine Freedom and Choice - they merely provide a framework to help the individual to make informed decisions."

"The individual will still be free to do whatever they want. This is just about effective engagement providing them with a framework to make sensible decisions."

Butcher also noted that pre-retirement guidance should be expanded and regularised with a default referral - with the option to opt out - to the SFGB prior to pension withdrawal. This would help savers decide how to access their savings at the point of retirement.

To avoid people cashing in their retirement savings prematurely, the PLSA recommended the use of the term ‘wake up pack' and the name of the MAS guide Your Pension: It's Time To Choose, should be reviewed.

Also, employers and the government should work together to develop an ambitious guidance agenda, including a mid-life financial health check at age 45. The government should require default referral - with opt-out - to the SFGB at the point at which savers want to start to withdraw pension savings and should promote a wider uptake of the CIPD's principles on age diversity in order to create a workplace culture that is more adapted to older employees.

Minimum contributions

The report also recommends increasing minimum contributions under AE from 8% of band earnings to 12% of total salary by 2030, requiring schemes to signpost to ‘appropriate product options' at retirement, and improving governance with a focus on ensuring schemes offer value for money.

The PLSA is calling for the minimum level to increase to 12% of salary between 2025 and 2030 if retirees are to be financially secure. As part of this increase, the PLSA is arguing for a 50/50 employer/saver split, which was widely supported by consultation respondents.

This would "guard against over-saving among low-income savers", and to provide flexibility in times of short-term financial need, the PLSA suggests further research into the use of opt-down and sidecar mechanisms".

It says these package of measures is needed to improve savers' engagement with pensions, including retirement income targets that show the lifestyle someone could afford on different levels of income.

There will be three target levels covering ‘minimum', ‘modest' and ‘comfortable' incomes, with carefully chosen titles to ensure they are interpreted correctly. The PLSA has commissioned independent researchers to develop these and will work with the government and industry on how these can be rolled out.

AJ Bell senior analyst Tom Selby said: "Improving engagement and understanding is absolutely essential if we are to build on the success of automatic enrolment and get people saving more for retirement.

"The fact half of savers believe the AE minimum is the government's ‘recommended amount' is worrying as for most people this will fail to deliver a decent level of retirement income.

"Without action from government, regulators and the wider industry, there is a real risk millions of people will sleepwalk into a retirement disaster.

"This report represents an important milestone in the debate on boosting pensions adequacy in the UK, bringing together most of the major retirement issues confronting policymakers.

"While it is clear we need to get people to save more for retirement, hiking AE contributions without first ensuring savers understand the value of retirement saving would risk a spike in opt-outs."

The PLSA's recommendations are welcomed by The People's Pension head of policy Andy Tarrant, who says: "While AE has been a real game changer for millions of people across the UK, most people still aren't saving enough to live comfortably in retirement.

"The PLSA's saving targets will help people to judge more accurately how much they need to save. To give people the confidence to make those extra savings, there are also reforms the industry itself can usefully undertake."

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• Topics
• Law and Regulation
• PLSA
• Hitting the Target