PLSA pushes for retirement income targets and AE increases

The PLSA suggested the introduction of national retirement income targets in a 2017 consultation paper, involving the development of income thresholds pertaining to minimum, modest and comfortable standards of living.

One of the biggest gaps is that people don’t understand how much they need to save for retirement, and having target incomes will be helpful

Kate Smith, Aegon

In a report published on Thursday, it listed its final recommendations following the consultation – including a call for the introduction of retirement income targets to make it easier to plan for retirement and encourage people to save more.

It has commissioned independent researchers to develop these targets, and said it will work with the government and industry on how they can be rolled out.

Boosting AE contributions

PLSA research found that eight in 10 people are not confident they are saving enough for retirement, while 51 per cent wrongly think the auto-enrolment minimum pension contribution level is the government’s ‘recommended amount’.

The industry body has called on the government to raise the minimum contribution levels for auto-enrolment from 8 per cent of band earnings to 12 per cent of total salary between 2025 and 2030, with at least half of this coming from employers to make sure it is affordable for savers.

To protect against over-saving among those with low incomes, and to provide flexibility in times of short-term financial need, it recommended further research into the use of opt-down and sidecar mechanisms.

Nigel Peaple, director of policy and research at the PLSA, said these “would allow people to continue to save into their workplace pension scheme whilst managing temporary financial difficulties and should avoid people opting out unnecessarily because of an unexpected expense”. 

He said that “the retirement income targets will take into account all the key products and services that savers may need in retirement”, from housing, food and toiletries, to hobbies, pets and financial support of relatives.

Auto-enrolment minimum contributions rose in April this year and are set to rise again in April 2019 to 3 per cent for employers and 5 per cent for staff. Further rises risk individuals baulking at the increases, with opt-outs rising above their current low levels.

“In order to maintain this we have suggested the increase in contributions should be weighted towards the employer, with 6 per cent employee contributions and 6 per cent employer contributions by 2030,” Peaple said.

A Department for Work and Pensions spokesperson said: “We have brought in phased contribution rate increases for workplace pensions and are committed to ongoing review to ensure we continue to balance the need to save with everyday costs.”

The spokesperson added that, for those who would like guidance on their pension, Pension Wise can help.

Employers and savers should take action now

Kate Smith, head of pensions at Aegon, agreed that more work needs to be done to help people engage with their pension.

“One of the biggest gaps is that people don’t understand how much they need to save for retirement, and having target incomes will be helpful,” she said.

She stressed that employers and employees should not wait for the government to decide whether to increase auto-enrolment contributions, which could take years and may be too late for some, and "should be taking action now".

The PLSA has recommended that retirement income levels be adopted by the forthcoming single financial guidance body, and used in scheme communications, pension statements, the pensions dashboard and pension calculators.

Tim Middleton, technical consultant at the Pensions Management Institute, welcomed “the objective of focusing the public’s attention from quite early on in their working careers about the need to set retirement income levels”.

However, he said he was not convinced that having the three ‘minimum’, ‘modest’ and ‘comfortable’ levels is necessarily a good thing.

“I’m concerned that some people might just target the minimum level, and not really think any further than that, but I think the general principle is certainly laudable,” he noted.

The PLSA’s report also called for the implementation of a new regulatory framework, where schemes and providers signpost savers to appropriate product options at retirement.

It said there was widespread support among consultation respondents for these proposals.

Andy Tarrant, a member of the ‘Hitting the Target’ steering group and head of policy at The People’s Pension, highlighted that it is not just the PLSA looking at this. The Work and Pensions Committee, the Financial Conduct Authority and the wider pensions industry have all been focusing on this area of late.

He said retirement income targets would make it “much easier for people to plan”, adding that “many people… assume that because the government has set an automatic enrolment minimum level, that that must be set at a level which would give a comfortable retirement”, when that is not actually the case.

The report also said the Pensions Regulator should do more to encourage high standards of governance in all schemes, including the publication of pension schemes’ annual chairs’ statements on its website in order to enable effective scrutiny and new powers for independent governance committees to enable them to safeguard members’ interests in decumulation as well as accumulation. 

A spokesperson for the Pensions Regulator said "driving up standards of governance is a priority for us".

“We have recently published updated guidance on chair’s statements, which incorporates new regulations and makes it clearer to pension schemes how to ensure a chair’s statement is compliant," said the spokesperson.

"We are taking action where chair statements are not compliant with the law," the spokesperson added.