Shifting the adequacy dial needs more than standards

Phil Brown says the Living Pension adds to calls for a consensus over AE minimums

clock • 4 min read
Phil Brown: The Living Pension raises awareness that the current saving rate isn’t enough

Phil Brown: The Living Pension raises awareness that the current saving rate isn’t enough

It was only a matter of time before calls began for there to be a Living Pension to which savers can aspire.

Almost inevitably, it was the Living Wage Foundation (LWF) that stepped forward with the admirable proposal, which would see employers commit to increasing the amount they pay into their staff's pension pots, meaning that they would receive 12% rather than the minimum of 8%.

The idea is that the employer does all the heavy lifting in this voluntary initiative, with a group of businesses and organisations already publicly committing to increasing their contributions from the current three per cent to seven per cent. The LWF says that the savings target is the equivalent of £2,550 a year, based on 12% of a real living wage worker's salary, which according to the foundation is £10.90 an hour in the UK and £11.95 in London. The employer would contribute at least £1,448 to this cash amount.

While the intervention of an important organisation such as the LWF in the national pension's conversation is to be welcomed, we must also beware of the danger of confusing time poor savers with another set of savings' standards.

The Pension and Lifetime Savings Association's (PLSA's) Retirement Living Standards, which were launched with great fanfare three-and-a-half years ago, seem to have worked their way into the consciousness of many within the industry and beyond. These standards, which tell consumers how much annual income they need for a minimum, moderate and comfortable retirement have been used extensively by the media, with at least one publication showing its readers what quality of wine they would be able to afford, based on how much they saved.

The risk with having more than one identifiable savings standard is that it confuses the consumer, who let's face it, is already overwhelmed by the mass of financial information that they are bombarded with.

We know through our own research that messaging matters as we found that savers contributing a total of 8% through automatic enrolment, incorrectly believed that by doing so, they would have enough in their pots to attain the sort of pension they had hoped for. They mistook the minimum for being enough.

The PLSA's three tier standards, which have recently been adjusted to account for the jump in inflation, give a clear illustration of how much is needed for an individual or a couple to reach each. The standards give an example of how often retirees of the future might be able to change their car or how many times a year they might be able to go away. All of which are vitally important to hardworking people, who dream of enjoying not having to work forever.

That's not to say that the LWF's initiative isn't an excellent one, especially now that some high-profile employers are already onboard. The figure of 12% auto-enrolment (AE) contributions is important as that is how much the PLSA also believes is needed if we are to improve the savings adequacy of UK workers. With six in ten people not saving enough to maintain their current standard of living in retirement, something needs to change.

The obvious flaw with the LWF's plan however is that it's voluntary and given that about 12,000 employers out of millions of UK businesses have signed up to its Living Wage in the past 10 years, shows how far we need to go.

We also know that many employers already match or better the increased contributions of their staff, but this alone will never be enough to shift the savings adequacy dial nationally. What the Living Pension does do is raise awareness that the current saving rate of the average UK worker isn't enough and we hope that it will increase the growing calls for there to be a consensus reached about what the minimum AE contribution rate of the future is.

For such a consensus to be agreed, the industry and policy makers must engage in meaningful dialogue with both employers and unions. The UK pensions system also needs a defined set of objectives, which include an aim that the state pension and statutory minimum AE contributions should target a given measure.

Such a change will take time, not just because we are currently in the middle of a cost-of-living crisis but because agreement in pensions isn't always easily reached. Not every worker has time on their side.

Phil Brown is director of policy at People's Partnership, the provider of The People's Pension

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