Future retirees will need higher saving levels to achieve similar living standards to current retirees, with younger workers in particular set to face significant challenges given demographic and economic shifts.
Research from the Pensions Policy Institute (PPI) and Columbia Threadneedle warned that longer life expectancies mean that savings will have to be spread across a longer retirement period, unless working lives can be extended.
Indeed, the average life expectancy for current 22-year-olds is four years longer than current retirees.
However, the research warned that whilst life expectancy is increasing, healthy life expectancy has not followed the same trend.
Furthermore, with financial pressures resulting in lower levels of home ownership, the report suggested that there will also be an increase in housing costs in retirement for future generations.
Current saving levels are not expected to prove sufficient, as the research revealed that someone currently aged 22, contributing 8 per cent of median earnings through working life, could meet the PLSA’s moderate Retirement Living Standard (RLS) for just 12 years, just over half of the average retirement, or the comfortable Retirement Living Standards for just four years, which is a sixth of the average retirement.
And whilst younger savers were of particular concern, the research found that anyone earning over £12,700 will require additional savings beyond the default 8 per cent of band earnings to reach their target replacement rate, which will allow them to replicate working-life living standards in retirement.
PPI senior policy researcher, Lauren Wilkinson, commented: “Young savers have seen the greatest uplift in pension participation rates because of automatic enrolment.
"However, most young savers are not on track to achieve positive retirement outcomes unless they make significant changes to their saving behaviour or without policy change.
"Young people are saving within a very different pensions landscape to previous generations, with greater individual exposure to risks and significantly lower employer contributions than seen in DB and pre-automatic enrolment DC schemes.
"Increased participation alone is not enough to deliver positive retirement outcomes, and they will require more support to achieve these.”
Columbia Threadneedle institutional business director, Andrew Brown, added: “The last 12 months have revealed the extraordinary challenges brought on by current economic uncertainty and rising inflation.
"Whilst the consequences of the current climate on present living standards have been well documented, less emphasis has been placed on how today’s cost of living crisis will affect future retirees.”
“The inadequacy of retirement provision is fast becoming one of the UK’s biggest socio-economic challenges. This year, The DC Future Book 2023 presents an important assessment of the potential harm to retirement outcomes that will be faced by young people without meaningful policy change.
"In addition, the report brings to the surface a consequential discussion regarding the impact of prevalent demographic changes in future retirees, such as longer life expectancy and lower levels of home ownership, and how these changes will impact saving potential.”
Brown suggested that reforms to extend auto-enrolment to lower earners and younger workers could help address these concerns, stating that alongside the Mansion House reforms and Value For Money framework, a focus on diversifying investment strategies and shifting away from a low-cost mindset, these could further improve member outcomes.
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