Lord Willetts: More progress is needed for adequate DC provision

The conservative party peer and executive chair of think-tank the Resolution Foundation revealed research that found 57 per cent of families on low to middle incomes had no form of retirement savings.

My biggest fear is not that people fail to plan for retirement, but that they plan for failure

Bonnie-Jeanne MacDonald, Dalhousie University, Canada

The foundation’s figures also showed 47 per cent of low and middle-income families would like to save £10 per week, but felt unable to.

Lord Willetts said at this week’s Nest Insight conference in London that the figures were “a reminder of the kind of financial pressures on people in a low income space”.

He urged providers not to be complacent after the implementation of auto-enrolment, but rather to consider further solutions to the savings crisis, including auto-escalation and digital education solutions.

“What has been happening with Nest and what has been happening with auto-enrolment is a fantastic British success story,” he said. “It would be great if we could be really ambitious on this.”

Apps could boost engagement

The conference also included an “appathon”, with developers pitching game ideas designed to educate people about the level of savings they will need for retirement, and to help them achieve these goals.

Shlomo Benartzi, a behavioural economist from the University of California, Los Angeles, said an understanding of behavioural biases would be vital to successful “gamified” advice apps.

He spoke out in criticism of a ‘people like me’ guidance approach, which has been implemented by schemes including the Unilever Pension Fund.

“The one problem is that not only does it not work in the pensions domain, it backfires,” he said.

He said the approach encourages those saving above the average level to reduce their contributions, while those below the average would feel despondent about their efforts.

How much is enough?

Other speakers encouraged DC schemes to gather information on members’ saving requirements.

Separating members into cohorts based on their financial situation, as implemented by Australian superannuation fund QSuper, can improve savings outcomes without the need for member engagement, said the super’s head of funds management, Charles Woodhouse.

Rowena Crawford, associate director at the Institute for Fiscal Studies, said whether developing apps for members or deciding on an appropriate default strategy, a key challenge is knowing “how much is the right amount to be saving”.

“It’s not a simple answer, it’s going to be highly individualistic,” she said. She explained that an individual’s saving requirements depend on a huge number of factors, including living standards during working life, expected health costs, and housing situation.

Traditionally actuaries and scheme providers have relied on replacement ratios when calculating members’ optimal savings level, with 70 per cent of working-life income seen as the ideal retirement income.

But schemes using this measurement risk seriously misinforming members about the adequate level of retirement income, said Bonnie-Jeanne MacDonald, post-doctoral fellow at Dalhousie University in Canada.

She said the ratio focuses on people’s working-life income rather than their spending requirements, so members might save too much or too little.

“My biggest fear is not that people fail to plan for retirement, but that they plan for failure,” said MacDonald. She urged schemes to consider her Living Standards Replacement Rate, designed to ensure members save enough to continue their current lifestyles.