How the PPI's answers to the adequacy question stack up

The PPI's report released yesterday, 'Increasing Pension Saving in the UK', explored how certain policy options might work in light of the freedom and choice reforms announced in this year’s Budget. 

The research showed that in order to achieve a two-thirds probability of reaching a target replacement income, medium and higher earners would need to contribute a total of 11 per cent and 12 per cent, respectively.

This assumes they start saving at age 22 through to state pension age, and with a triple-locked, single-tier state pension. 

However, for the same result, a lower earner would need to contribute 9 per cent, leading to concerns that median-higher earners are at greatest risk of falling short of their target incomes. 

The adequacy gap

The total statutory minimum under auto-enrolment for employer and worker currently stands at 2 per cent and will increase to 8 per cent in October 2018.

The PPI said the government could explore raising minimum levels for this group, adding that contributions of at least 12 per cent would be needed for median earners to achieve a reasonable outcome. 

The report, produced in association with JPMorgan Asset Management, stated: “The government could establish higher minimum contribution rates only for median-higher earners, who are at greater risk of not saving enough for an adequate income in retirement, such that lower earners would not need to opt out due to affordability concerns.”

But Martin Freeman, director at consultancy JLT Employee Benefits, said this might be a “step too far”, adding that prescriptive regulation could lead to unintended consequences. 

“For example, would someone be worse off after a small earnings increase which tips them into a larger pension deduction?,” he said.

“Secondly, auto-enrolment is already complicated enough; we don’t want to make it even more so. The prospect of managing someone who is hovering around a higher contribution threshold isn’t one I’d relish.” 

Chris Curry, director at the PPI, said at the report launch that notions of adequate replacement incomes “would have to be revisited in light of the Budget, as income streams will not be constant”. 

We need a system that delivers reasonable outcomes, even for those who are disengaged

Sally West, Age UK

Also at the event, Sally West, income and poverty officer in charity Age UK’s policy division, said inertia-based strategies would be worth exploring further. She pointed to the US example, where some schemes use auto-escalation strategies to get workers to pre-commit to future contribution increases. 

She added: “We need a system that delivers reasonable outcomes, even for those who are disengaged.” 

The PPI research also looked at more employer-led matching-type arrangements as a possible cost-effective way of motivating and rewarding those who want to save more for retirement. 

It stated: “This may be more attractive to employers than higher contributions for all workers as they are targeting the rewards at those who value them most.” 

Matching was used by 67 per cent of employers, with 48 per cent of members contributing the maximum amount in order to benefit, according to figures from the National Association of Pension Funds’ 2013 annual survey cited by the PPI.

Even more flexibility

Despite the Budget changes giving individuals access to their pension pots from age 55, the PPI said the government could also explore stretching this to include earlier access for major lifetime expenses, such as a house deposit. 

“Early access provision may especially incentivise younger people (ages 20-29), women, and men and women in low income groups, who have traditionally been amongst the groups least likely to be saving enough for their pensions,” the report said. 

However it acknowledged this introduced a risk of savings being depleted significantly ahead of retirement and that it could be burdensome to administer.