Retirement gulf: The scale of the savings shortfall laid bare
Savers are in material danger of missing out on a comfortable retirement, according to a new report which aggregates defined contribution statistics from across the industry
UK workers are at risk of either unwittingly failing to save enough for their retirement or being entirely disenfranchised by the auto-enrolment process, experts have warned in a comprehensive new report.
Employees who meet the current threshold for auto-enrolment are saving an average of six percent into a pension scheme, according to new research by the Pensions Policy Institute (PPI). This includes an average employer contribution of four percent and employee contribution of two percent - not enough to secure a comfortable retirement.
PPI modelling shows that with savings rates at six percent, median earners only have a 50 percent chance of achieving a reasonable standard of living in retirement. Such earners need to put aside a combined employer/employee contribution of somewhere between 11 and 14 percent to have a two thirds chance of replicating their lifestyle in retirement.
“Even if we double or more than double our savings rate, we’re still not in a great place”
The risk is that people who have been auto-enrolled assume that they are saving a sufficient amount for a comfortable retirement by staying in their government-sanctioned pension scheme.
In reality, as Chris Wagstaff, head of pensions and investment education at Columbia Threadneedle, the asset manager which sponsored the research, said: “Even if we double or more than double our savings rate, we’re still not in a great place.”
Speaking at the report’s launch, Michelle Cracknell, chief executive of the Pensions Advisory Service, said: “I was really struck by one of the things that came out in this report: [If a saver asked] ‘If I did everything right, i.e. if I followed auto-enrolment, went into the default fund, etc, would I be okay?’ And the answer is ‘Probably not.’”
How can government, employers and industry narrow the nation’s savings gulf?
Cracknell explained: “In financial services, we need to be more accessible, in three ways. The first one is the language that we use. It should mean something to people in the street, as opposed to just to us.
“The second is we should make it easier to buy things. I think we make it incredibly difficult to buy an investment. One of the things we say at the Pensions Advisory Service is the easiest question we get and the hardest one to answer is ‘How do I set up a pension plan?’
“I think the third area is that we should stop being so glum! … When we talk about pensions, we get ourselves into a really glum space and we don’t make it believable for individuals that doing something will make a difference.”
Campbell Fleming, Columbia Threadneedle’s CEO for Europe, the Middle East and Africa added: “It’s easier to get into debt in this country than it is to get into pensions. I’ll go home each evening and there will be something from Barclaycard with a pre-filled £20,000 application form for a new credit card for me. If I were to send out here a pre-filled ISA, the simplest saving product, saying ‘Buy one of the funds that Chris [Wagstaff] just took us through,’ I’d be brought down to Canary Wharf to see the headmaster.”
Further widening the retirement gulf is the fact that 5.2 million working people are disenfranchised by auto-enrolment – almost as many as the 5.4 million who are deemed eligible. Women, disabled people and ethnic minorities are especially disadvantaged by the current auto-enrolment thresholds, said Chris Curry, director of the PPI, who remarked at the launch that they are a “real concern.”
Curry continued: “If you are earning over £10,000 then auto-enrolment is almost certainly a good thing for you to do, but by doing that we have potentially missed out on a whole host of people that it could be a good thing for as well. It’s something that should be examined and probably will be again next time the threshold is reviewed.”
A common justification for excluding low earners from auto-enrolment is that the state pension provides a sufficient replacement income. Curry believes this is an oversimplification.
For instance, Curry points out that people on low incomes may have two part-time jobs, in which case they wouldn’t be assessed for auto-enrolment. The PPI estimates that a further 80,000 people would be eligible for auto-enrolment if incomes from both first and second jobs were assessed collectively. Women are most disadvantaged by this rule; they are 60,000 of the 80,000 aforementioned workers.
A better retirement hangs in the balance
It is clear from the report that even small changes in policy and behaviour could have a huge impact. By 2030, aggregate assets in DC schemes could vary by about £80 billion as a result of employee and employer behaviour and policy, according to the PPI.
“We make it incredibly difficult to buy an investment”
The PPI’s baseline assumption is that private sector DC assets will reach £572 billion by 2030. However, if the government were to raise the minimum contribution rate to 9 percent, assets could reach £582 billion. Conversely, if 25 percent of employees opted out, assets could languish at £501 billion.
This illustrates the key role of the government and employers in narrowing or widening the retirement gulf for savers nationwide.