90% of DC savers at 'high risk' of inadequate retirement income

Around 90 per cent of defined contribution (DC) pension savers, including 5 million people aged between 50 and state pension age (SPA), are at risk of not achieving an adequate income replacement rate in retirement, according to research from the Pensions Policy Institute (PPI).

The report, which was sponsored by the Centre for Ageing Better, revealed that one in four people aged between 50 and SPA, equal to around 3 million savers, are also at risk of not reaching the Joseph Rowntree Foundation (JRF) minimum income standard.

In particular, single person households were found to be around four times more likely to be below the JRF minimum income standard, whilst low-income households were twice as likely to risk inadequacy under the JRF minimum standard.

In addition to this, it found that one in three savers can expect a ‘moderate’ retirement under the Pensions and Lifetime Savings Association (PLSA) definitions, whilst just one in ten can expect a ‘comfortable retirement’.

The report highlighted the figures for those approaching retirement as “an immediate cause for concern”, adding that future generations are “equally at risk” of being financially unprepared in retirement.

Indeed, it emphasised that the UK is currently on track for a quarter of people approaching retirement to fail to receive even a minimum income, whilst only around half of people can expect to maintain a personally acceptable level of income in retirement.

The challenge of maintaining an acceptable level of income is expected to be greatest for the highest paid, as 77 per cent of those in the top quintile are expected to miss their target, compared to just 3 per cent of the bottom income quintile.

The report also noted that those from under-pensioned groups, including carers, women and those from Black, Asian and Minority Ethnic groups, face more difficulty in achieving adequacy targets, pointing out that many of these groups will have also been particularly hard hit by the pandemic.

More broadly, the report suggested that the pandemic may have financial and behavioural consequences for adequacy, with analysis suggesting long-term economic scarring of around 3 per cent.

The Centre for Ageing Better also argued that, fuelled by the pandemic, the situation is “ripe for an imminent retirement income crisis”, arguing that the consequences will be "devastating" for the UK's long-term economy, unless “urgent steps” are taken to avert this.

In light of the findings, the PPI has called for a “settled consensus” on retirement income adequacy to be established, suggesting that this be driven and supported by government, in order to ensure buy-in from employers, industry, unions and stakeholders.

It also stated that the new consensus on adequacy will need to blend the needs for both an income stream and access to liquid savings and assets, in order to ensure that people can navigate day-to-day needs and life changes in retirement.

PPI head of policy research, Daniela Silcock, commented: “Changes in the way people work, save and retire mean that traditional measures of adequacy are not as relevant as they used to be.

“A new consensus is required to generate retirement income adequacy targets which people can use, and which allow for both income and liquid capital in retirement.

“Achieving a consensus will not be straightforward as it requires agreement from industry, employers and unions and the overall support of government in order to ensure all key stakeholders play their parts.

“Therefore, action from the government to pursue this agenda will be necessary soon, to help prevent future generations of older people experiencing poor retirement living standards.

“These stark figures underscore the urgency to develop relevant, accessible and achievable adequacy targets for those saving today, and for future generations.”

The call for a consensus received support from the PLSA, as its director of policy and advocacy, Nigel Peaple, stated: “We agree with the PPI that the UK should establish a national consensus on what is meant by an adequate income in retirement.

“We believe this consensus is needed so as to guide the level of automatic-enrolment contributions, the value of the state pension, and the fiscal support for additional pension saving."

Alongside this, Peaple argued that the level of automatic enrolment contributions should also be increased from today’s under 8 per cent up to 12 per cent by 2030, split 50/50 between employer and employee, that the state pension triple lock should be retained, and that the current level of fiscal support for pension saving should be maintained.

The Centre for Ageing Better also urged the government to act on auto-enrolment reforms, such as lowering the age criteria and removing the earnings threshold, as well as exploring raising the minimum contribution rate by an additional 8 per cent.

Commenting on the report, Centre for Ageing Better chief executive, Anna Dixon, stated: “The low level of the state pension in the UK, at just 24 per cent of the national average income, means people are unable to rely on the state pension to provide an adequate income in retirement.

"Many people don’t have enough pension savings to support a decent standard of living in retirement.

“Further action is needed to ensure millions of people approaching retirement and generations to follow do not find themselves without adequate income in later life.

“While auto-enrolment is boosting the number of people saving for retirement, it is not sufficient to secure financial security in later life.

"We are calling on government and employers to do more to support people to achieve a decent standard of living in retirement and to boost pension savings for those approaching retirement.”

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