Nearly a third of Gen Xers have inadequate pension savings

The ILC’s ‘Slipping between the cracks’ report found that 60 per cent of Gen Xers in a defined contribution scheme are not contributing enough for financial security or flexibility later in life, while 59 per cent of those with insufficient savings lack any other kind of income, for example property.

More than two-fifths (44 per cent) have gaps of at least 10 years in their contributions, a figure that rises to 48 per cent for women.

With many Gen Xers too overwhelmed with other priorities, it is vital that the government builds on the success of auto-enrolment to support people to reach an adequate retirement

Sophia Dimitriadis, ILC

The report found that only seven per cent are saving for a “moderate lifestyle” in retirement, defined as providing “some level of freedom and resilience to shocks”.

Worryingly, a full 17 per cent “don’t even know how much they’re contributing”, the report continued.

Andy Curran, chief executive of Standard Life, said: “Many Generation Xers don’t have adequate pension savings in place, and sadly face financial vulnerability in retirement. Many entered the job market too late to take full advantage of final salary pensions, yet too early to enjoy the full benefits of initiatives like auto-enrolment, and their retirement income will be stretched as a result.”

“Mid-life MOTs” and annual spending reviews would improve things, and members should be encouraged to “engage with their finances as early as possible to gain a better understanding of what they’ll need in the future and so [be] better placed to take the necessary steps to achieve a more comfortable retirement”, he said.

It’s not too late to improve

Sophia Dimitriadis, research fellow at ILC and report author, said that there is “still time to support the retirement prospects of Generation X and alter their current trajectory”.

“But with the oldest members of this generation retiring in just over a decade, we will need to act fast. The majority of people with DC pension savings are chronically under saving, and with many Gen Xers too overwhelmed with other priorities — like caring responsibilities and the additional pressures from the pandemic — it is vital that the government builds on the success of auto-enrolment to support people to reach an adequate retirement,” she said.

Increasing minimum pension contributions is “clearly vital”, Dimitriadis continued, “but it’s important we include an element of flexibility by allowing people to temporarily pay into their pensions at a lower rate if they are really struggling financially”.

“We can also prompt people to save more once they’ve paid off large debts — such as once they’ve paid off their mortgage or student debt, and automatically increase pension contributions when people receive a pay rise, or after a number of years of pension contributions,” she said.

“The government can also introduce a flat rate 30 per cent tax relief to enhance the pension pots of low earners, many of whom are struggling to afford to save more for retirement.”

Experts cited a range of ways to address the problems identified in the ILC report. Andrew Tully, technical director at Canada Life, said the solution had to be building on the successes of auto-enrolment, adding that “auto-escalation of contributions at annual salary review time would begin to close the gap”. 

“AE could be extended to the self-employed, but here of course the individual receives no contribution from an employer, so we would need to get creative with the tax system to further incentivise,” he said.

Steven Leigh, associate partner at Aon, suggested that one approach should be for employers “to get a handle on the expected pension outcomes for their employees and to take action for groups, such as Gen X or certain job roles, where there may be a shortfall”.

“This could involve increasing the default contribution rate for the pension scheme, so that people automatically save more into their pension without having to take any action, while still allowing employees to opt for a lower savings rate if they are currently struggling financially,” he said.

Meanwhile, Barnett Waddingham partner Andy Parker said that tackling the “fragmented” nature of pensions resulting from changing working patterns will be important, while savings rates could be improved by improving default positions, introducing workplace campaigns “to educate employees on what ‘people like them’ are doing, and what they need to do to get an adequate income”, and by implementing programmes to increase contributions.

Communication is key

Parker continued: “If we know what they need to be engaged with, then this will enable cohort-specific communications to cover the issues of importance to this group.

“It is not normally about joining a pension, for this group it is about paying in more (at the younger end of the age profile), thinking about when and how benefits might be taken (for those at the older end of the profile) and looking at how money is invested to give the benefits needed (for those in the middle).”

Paul Enderby, senior vice-president in Redington’s DC consulting team, told Pensions Expert that there is “no excuse now for providers and administrators not to be able to show, clearly and simply on benefit statements, apps and dashboards, how much a member is actually paying”.  

He said: “If DC providers or administrators are unable to invest in the technology to deliver such communications, this should be a red flag to sponsors and trustees.”

Though auto-enrolment has solved the problem of contributions not being made at all, more needs to be done to tackle the problem of inadequate contribution rates, Enderby continued. He recommended the Pensions and Lifetime Savings Association’s retirement living standards as “a great starting point” that he expects to see as “being a key part of a communications strategy”.

Stark choice for younger workers

Gen X is not the only cohort struggling with inadequate retirement provision. Research from LCP has previously shown that, due to falling investment returns, an individual enrolling in a DC scheme today would have to contribute 12 per cent to make the same back as a person contributing 8 per cent a decade ago.

A new report from the consultancy has shown the “stark choice” facing younger savers: besides higher contribution rates, they can either take on more risk, for example by moving to a 100 per cent equities strategy, or else to work 10 years longer and retire at 78.

This is required just to “stand still”, the report noted, relative to the earnings of savers starting a decade earlier. 

LCP partner Dan Mikulskis said: “Falling investment returns are a challenge for all investors and a common recommendation is to save more to make up. But there are other options, including working for longer or taking more investment risk.”

He continued: “Taking more investment risk is always a tricky balance, but by moving more of their pension into growth assets such as equities, younger people could expect a better return and could save themselves having to work well into their seventies.”