Calls for AE reform grow as research reveals DC inadequacies

Defined contribution (DC) adequacy concerns have continued to grow, with industry research revealing that a moderate retirement living standard may be out of reach for many auto-enrolled savers, and even more so for renters.

Analysis from Hymans Robertson found that "staggering" annual contributions of 20 per cent are needed for those earning £45,000 or more to reach a 'comfortable' level of retirement, per the Pensions and Lifetime Savings Association (PLSA) Retirement Living Standards.

The 'moderate' level of retirement may also prove unattainable for the majority of auto-enrolled savers, unless they increase their pension contributions above the current minimum, the analysis found.

However, most DC pension scheme members are likely to meet the PLSA minimum retirement living standard with the current minimum total contribution rate of 8 per cent under auto-enrolment, assuming they are entitled to the full state pension.

The analysis painted a particularly bleak picture for those earning £15,000 or less, revealing that, even with high contributions, they have little chance of reaching the moderate standard.

Hymans Robertson lead digital consultant for DC pensions, Darren Baillie, highlighted the findings as "a stark warning" about the potential inadequacy of DC contributions, warning that the expected standard of living of many members will not be met without "significant, and costly, changes".

However, Baillie acknowledged that many are struggling with the cost-of-living crisis., explaining that increases in energy bills and mortgage payments are likely to result in pension contributions being pushed further down the savings priority list.

Renting costs could also present a challenge amid rising house prices, as Hargreaves Lansdown's analysis found that only 16.3 per cent of older workers who rent are on track to receive a moderate income in retirement, compared to 57.7 per cent of those who own their own home.

This is a particular concern for Gen X workers who have not benefited from auto-enrolment for as long as younger workers, with only 17.3 per cent of Gen X renters on track for moderate retirement, compared to 24.5 per cent of Gen Z and 22 per cent of Millennials.

Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, stated: “Soaring house prices and rent have put huge pressure on people’s finances with the retirement resilience of older workers in particular being affected.

"Increasing house prices mean more needs to be saved for a deposit but rising rents mean you can’t afford to put enough away – it’s a vicious circle that keeps your housing costs high and in turn limits how much you can put away for your retirement years.

"As the prospect of home ownership gets further out of reach for many people, they will need to brace for the prospect of saving for increased costs in retirement to compensate.”

Indeed, research from Standard Life suggested that increasing minimum contributions could help significantly boost financial wellbeing, revealing that if auto-enrolment contributions were increased to 12 per cent, savers could have around £162,023 more in retirement.

In light of this, Standard Life workplace managing director, Gail Izat, suggested that while the short-term financial pressures should remain the focus now, increasing the minimum contribution level to 12 per cent over the next decade would be "sensible".

"If combined with other measures such as the removal of the current lower earnings limit and the opening up of auto-enrolment to 18-year-olds, this will prevent future generations from sleeping walking into retirement while thinking that their savings will be sufficient to support them in later life," he stated.

This was echoed by Baillie, who suggested that an "overhaul of the current auto-enrolment legislation" is needed, with much more done to encourage individuals to forward plan and invest in their pension, even during challenging times.

"We continue to call for the AE minimum total rate to be increased to 12 per cent and would urge the new pensions minister to add this to the top of their to-do list," he continued.

“We would urge employers to do all they can to ensure their members are aware of the importance of contributions and provide support to help them set realistic and achievable retirement income targets.

"Furthermore, providing members with the means to monitor progress against their targets and understand how their goals can be achieved is vital in helping a generation avoid a rude awakening in retirement.”

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