The government has been urged to adopt a relative pension adequacy measure, rather than a 'pounds and pence approach', with analysis from Hargreaves Lansdown suggesting that relative measures better reflect the income needs of different groups.

The research from Hargreaves Lansdown, in partnership with Oxford Economics, looked at four different ways to measure pension adequacy, revealing that there are "clearly" challenges with all of the approaches.

In particular, the research found that whilst 'pounds and pence measures', such as the Pensions and Lifetime Savings Association (PLSA) Retirement Living Standards and the Living Wage Foundation’s Living Pension, can help identify those at risk of missing minimum income targets, they can also be misleading for both higher and lower earners.

Using data from Hargreaves Lansdown's Savings and Resilience Barometer, the analysis showed that ‘pounds and pence measures' would suggest that around three-quarters of households are achieving pension adequacy.

However, Hargreaves Lansdown warned that this could lull savers into a false sense of security, pointing out that these measures aren't meaningful for wealthier households, because they aren’t reflective of their current living standards.

In addition to this, it argued that using a pounds and pence figure can give the impression that lower earners are falling behind, when in reality, they don’t need to hit higher targets to maintain their current lifestyle.

The HL Savings and Resilience Barometer demonstrated this, as less than a tenth (8 per cent) of the lowest-earning households are on track to meet the PLSA’s moderate retirement income standard, compared to 68 per cent of higher earners.

Hargreaves Lansdown acknowledged that there are also challenges with relative measures, such as the Target Replacement Rate (TRR), and expenditure benchmarks, as, under these measures, higher earners can be seen to be undersaving, as they have a higher target to hit, while lower earners may have a much lower target.

However, it argued that relative measures and expenditure benchmarks better account for the ability of households to maintain living standards into retirement, urging the government to adopt a relative measure, alongside an absolute minimum income underpin.

Regardless of the approach used, Hargreaves Lansdown emphasised the need for housing costs to be factored into adequacy measures, noting that an increasing number of retirees will find themselves either renting or paying a mortgage into their retirement years, which will push up their costs.

However, it found that only current retirement expenditure and the Living Pension take any account of these costs.

Commenting on the findings, Hargreaves Lansdown head of retirement analysis, Helen Morrissey, said: “Are we saving enough for retirement? If not, why not and what can we do about it? The answer depends on having a reasonable view on what adequacy looks like.

"Without it, we risk groups of people continuing to undersave and potentially receiving a nasty shock when they come to retire....It's a vital issue at the very core of long-term saving success.

"The government’s upcoming assessment of pension adequacy will form the basis of its long-term thinking around pensions. The future direction of auto-enrolment and the state pension needs to be based on a firm foundation of the reality for retirees today.

"Right now, there isn’t a common approach, and people are left in the dark about what they need to save. Using the wrong measure could give people either the false hope they are saving enough or the misplaced worry that they’ve fallen way behind."

The group has since made a number of recommendations ahead of the government's pension adequacy review, advocating for the use of TRR with an underpin of the Living Pension.

It also argued that the state pension plus automatic enrolment minimum contributions should absolutely meet the minimum underpin.

Hargreaves Lansdown also encouraged the government to explore the opportunity to incentivise voluntary contributions by encouraging employers to boost their own contributions for those employees willing to increase theirs.

However, the group said that contributions may not need to be increased further for all individuals, suggesting that this will be more of a concern for higher income households, who will need higher contributions as they target higher retirement incomes

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